By Adam Tavener
16.09.2014
Not everything that comes out of a credit crunch fuelled recession is bad. As with many other situations in life, necessity gives rise to invention and unmet demand creates inventive means of providing supply.
In 2012 the government commissioned a report into access to finance for SME’s by the then chief exec of legal and general, Tim Breedon. Unsurprisingly the report concluded that there was an existing and growing deficit between the amount of credit available to the SME sector from the main banks and the amount needed by the sector to remain healthy and to grow. To be precise it was an eighty four billion pound gap.
Breedons conclusion was that there were already alternative funders out there, but the banks were not active enough in signposting rejected applicants to the alternative sector. Thus they should be encouraged to do so.
In part he was right. The gap left by the banks effectively pulling out of large parts of the SME funding market was already beginning to attract a new breed of entrepreneur led financing propositions. Our own Pension Led Funding had actually been around for many years but was now being joined by the likes of Peer to Peer lending, crowdfunding and various privately funded cash flow or asset backed SME lending propositions. In addition to these new players we also saw the continued growth in community based finance initiatives and various government backed start up packages. All encouraging but actually somewhat confusing and chaotic with no clear path to an appropriate outcome and many metaphorical alligators in the swamp to catch the unwary business owner.
There was, unsurprisingly a flaw in Tim Breedon’s logic. In the regulatory environment that existed then and exists now a referral by a bank to an alternative funder leaves the bank vulnerable to criticism from the regulator if the outcome proves unsatisfactory. Thus there is risk for the bank but no gain. Surprisingly, and in spite of this, many good business relationship managers were already trying to help customers find funding outside of the bank but this was at some career risk to themselves and was pretty haphazard in nature. What was needed was an ordered system that delivered simplicity to the business owner and safety from regulatory opprobrium for the referring bank.
Your author was invited to a Downing Street summit to discuss these issues late last year and at that meeting put forward some suggestions which were to become the foundation for what we now know as Alternative Business Funding, or ABF.
In short I suggested that non bank funders were nearly invisible to the average SME owner, however by collaborating and recycling their own rejected credit applicants between themselves they could create a working model, a template which could be adopted by the government (possibly through the business bank) for how bank referrals could be dealt with and processed by the non bank sector. This template or portal should deliver a simple and anonymous journey and end up matching a business owner with the funder or funders who have a clear appetite for the type of business being proposed.
The idea was that, having demonstrated its effectiveness, the portal could be used by or adopted by the government who would then introduce a change in the law and require banks, by law, to refer rejected SME applicants to this new ‘safe’ portal without fear of the regulator and with the confidence and knowledge that they were retain the business customer for their day to day banking needs. In other words the non bank sector could ‘incubate’ them until they were able to successfully obtain banking from the mainstream sector.
Much positive noise came out of the summit and I was asked to put together a paper for the prime Ministers Special Adviser, which I did. More positive reaction, however I did feel that the participants in the non bank sector could deliver a lot of this without help or sanction from BIS or The Treasury, so I spent some time assembling a group of pioneering non bank funders who shared my vision for a collaborative environment which could be used as the model for SME finance acquisition in the future.
Thus, in March of this year ABF was officially launched, with Vince Cable immediately announcing his support and immensely positive press coverage from home and abroad. The initial collaborators were ourselves,( Pension Led Funding),Funding Circle, Platform Black, Seedrs, Zopa, Market Invoice and Crowdcube.
The effect was electric and immediate. We were swamped by new style funders wanting to join the platform, and traffic across the site got underway immediately. To date there have been over ten thousand businesses visit the site, with a sixty five percent click through rate to a funder. We are very proud of that. We are also very proud of the fact that our initiative has, indeed, led to a change in the law, announced in early August by The Chancellor, requiring the major banks to refer rejected business owners to the non bank sector via private sector platforms, and I am confident that ABF will be one of those platforms as we have been, and continue to be working very closely with The Treasury to determine what this new ‘funding ecosystem’ will look like and how it should work.
It was important to us that the platform should include all types of alternative funders, not just tech based solutions, and thus the inclusion of the CDFA was an important step for us as its methods provide balance and the kind of face-to-face interaction that is so important in many business funding discussions, especially early stage or growth.
There are now ten listed funders who have, between them, provided finance to over forty thousand businesses across the UK. That gives us some reach and clout. There are another twenty plus waiting to join immediately and the BBA has indicated that its members would wish to be listed on the site in the event of government designation of ABF to deliver the new legislation.
We are, without a doubt seeing the first steps in a seismic shift in the way SME owners go about acquiring finance in the future and ABF and its participants are extremely proud to have played such a pivotal role in this and to have been a catalyst for change at such a rapid pace.
Adam Tavener
Chairman
Clifton Asset Management Plc