Cracking the SME finance conundrum – a role for behavioural insight?
For some years now, we have known that there is a deep structural problem at the heart of the British economy. Successive Governments have proposed sweeping reforms to address it, yet still the problem persists: small businesses that are looking to grow cannot reliably get the capital they need to so do. Sometimes, this reflects the viability of the business proposal or cyclical economic conditions, but all too often it seems to be a reflection of the banking sector, not of the SME. That tells us something: the current model is broken. We need to recognise this as a structural problem, and in doing so, look further afield for innovative solutions.
Some weeks ago, I spoke at the All Party Parliamentary Group on Small Business about the growth of the alternative finance industry, and how this could be a long-term solution to the finance gap. The sector is growing rapidly, but challenges remain. One of the main barriers to the sector being part of the ‘structural’ solution is a lack of awareness, yes, but also about tackling entrenched behavioural norms. Most SMEs treat the bank as their first, or indeed, their only port of call. According to figures from the Department of Business, Innovation and Skills, seven out of 10 UK SMEs that are refused a loan by their bank do not go on to look for alternative finance. Considering first-time SME borrowers face a 50% rejection rate, this indicates that a sizeable chunk of entrepreneurs are struggling to finance their businesses.
Last week, Innovate Finance hosted a roundtable discussion on the further steps which are needed to tackle this problem. We had attendees from across industry, policy makers, parliamentarians, think tanks and industry researchers – all discussing the way forward. Tanya Ziegler from Cambridge University’s Centre for Alternative Finance spoke of the extraordinary growth seen so far, but also the huge scope for expansion (in 2014, AltFi was equivalent to 3.3% of new bank lending to SMEs – in the coming years, Cambridge expect that to rise to 14%).
We also spoke in depth about the problem of awareness and behavioural change and how the lessons of behavioural economics (aka Nudge) can be applied here, as they have in other policy areas. Awareness of the sector is increasing, but this needs to be accompanied by greater understanding of why an alternative finance solution can often be more appropriate than a high street solution. A recent survey by the British Business Bank found that although 40% of survey respondents were aware of peer-to-peer lending, only 1% had accessed funding through a peer-to-peer lending platform. This was further cemented by the British Chambers of Commerce who identified a high degree of reliance on tradition debt finance in a poll of its members, explaining that there remains “little understanding of alternative finance options”. The industry has enjoyed extraordinary success so far, but this illustrates the size of the challenge that still confronts us. GLI, along with industry partners and Government, will continue to play our part in closing that gap.