John Davies, Chief Executive Officer of the Just Loans Group, talks to Financing Growth about bridging the funding gap, employing the latest FinTech and helping businesses to invest and grow
I speak to a lot of small business owners and there is a common theme of ‘confusion’.
On the one hand they are praised for being the backbone of the UK economy, employing 15.6 million people and generating £1.8 trillion in combined annual turnover (47% of all private sector turnover) – according to the latest figures from the Department for Business, Innovation & Skills.
On the other, they are at the centre of a constant diet of alarmist headlines around access to bank lending, unfair treatment by the banks, the impact of Brexit, and so we go on. It seems, from what we read, that there is a perpetual battle raging between the banks and the country’s SMEs. Whilst many tell me that they are satisfied with their bank and would be much happier to see positive headlines about business successes and their huge contribution to the UK economy, there does remain a sufficiently embedded view that banks, and the support from them, has changed.
So why the confusion, and what is really happening?
Let’s start with what the banks have actually been lending. It is true that there is a trend, which is now well enough established to be credible, indicating that the high street banks have at best slowed down their lending to SMEs, and have at worst reduced it. The Bank of England Quarterly Credit Conditions Report is clear on this. What is less clear is whether the cooling off has been supply driven or demand driven. The banks would claim that they have always been hungry to lend but businesses were showing a reluctance to borrow, whilst the businesses unable to get credit would argue the reverse.
The truth is that it is probably half of one and 50% the other, but the impact has been the same. There is a perception that the banks have changed. This perception has become reality and that has opened the door to the emergence of alternative funders.
If we analyse the banks’ argument, a combination of the credit crunch and the imposition of ever more demanding capital requirements to support their lending books, has gradually driven the move towards better quality exposures. Additionally, banks have struggled to make the tightening regulatory environment on KYC and money laundering customer friendly.
On risk though, quite how ‘better quality’ has become defined is an open question. Those no longer being supported would say that the loss of their local bank manager with the discretionary ability to lend to businesses with whom a relationship has been built over many years, and the centralisation of computer based assessment models have both worked against them. Probably true, but they might just have worked against them because their businesses had been unable to satisfy a tried and tested ‘intelligent’ computer serviceability test. In other words, simply they could not afford to repay a borrowing, and rightly their lending request was rejected.
The perception plays its part here too though, as even the ‘good credits’ have shown a reluctance to borrow which unquestionably adds weight to the demand side of the debate.
Three drivers come into play:
• A belief that the bank was closed to lending.
• A general reluctance to become over reliant on debt, even for expansion and growth.
• An impatience with the regulatory process and the time taken to complete the loan journey.
The consequence of this group’s response in particular is what has stimulated the rapid emergence of the alternative lenders.
Their more nimble systems, enabling faster decision making and the belief that their credit hurdles were lower than the high street banks, have proved attractive to businesses.
Today, we have a well established and vibrant alternative lending sector that is increasingly complimenting what traditional banks are able to offer. So far in 2016, alternative lenders have provided just shy of £3 billion of valuable business funding, a 113% increase on the corresponding period two years ago, with no indication that this growth rate will not be repeated year on year.
But are the pin stripes of Threadneedle Street peering over their half moon glasses knowingly waiting for the alternatives’ crash landing? Convinced of the inevitability of large losses through lending to borrowers less attractive to the high street banks, and the transactional, as opposed to relationship, nature of their operations, surely the ‘alternatives’ will not enjoy longevity, leaving the wisdom of the long established banks to prevail.
Indeed, if the alternative lenders were blind to these two points, this would be a reasonable conclusion. Of course though, they are not. The success of the alternate model lies in achieving ‘speed and efficiency without material impairment’.
The rapid emergence of FinTech solutions have enabled new players, unburdened by legacy systems, to develop platforms that are able both to analyse more accurately and deliver more promptly, preserving the book quality, and proving to be popular to borrowers.
Using the Just Loans Group as an example of one of the nimble new lenders, the technology we use provides a wide variety of current and historical data points, many of which haven’t been traditionally used. Decisions can be made quickly and funds made available in a matter of days.
A prime example of data that hasn’t historically been used is what appears on social media platforms such as Facebook and LinkedIn. Social media often tells us products are in high demand, are receiving very positive feedback and the company is set to grow – something a business plan can’t demonstrate.
For example, we were approached by a company that wanted to raise funds for a stock purchase and wanted us to help as they were currently in the process of changing banks. What really tipped the balance and gave us the confidence to lend was finding, through a search of online portals and social media sites, that the business owned a very well known and successful clothing brand targeted at 16-30 year olds.
Similarly, we were approached by a small start-up vehicle rental company looking to grow their fleet using our finance facilities as deposits for HP agreements. Again, reviewing online portals and social media revealed the young man behind the business was embarking on his third start-up, having previously set up a successful children’s entertainment company and a car sales showroom. He had received many positive endorsements and was building a successful brand.
In both cases, social media data had a very positive impact on our decision to lend.
Our technology allows us to on-board customers as quickly as possible after carrying out all the necessary checks and assessments. This means you have to have access to a wide range of data sources to complete all the essential KYC and AML assessments and to gain a complete picture on day one of the company, directors and shareholders. The ability to do this is going to become even more important as the EU 4th Anti-Money Laundering Directive will shortly be implemented, significantly increasing the data that has to be sourced and checks that have to be made.
We have invested heavily in developing PropensityPlus®, our own proprietary FinTech driven underwriting module that, as the name suggests, uses technology to gain insight into the propensity for both directors and businesses to be successful in the future. The technology and expertise of our underwriters significantly enhances our ability to make timely and well informed lending decisions.
The key is gathering all the data and having the technology to look for mismatches – then highly experienced staff step in and question the information and speak to prospective customers for clarification.
This approach has worked well for us and is an example of what alternative lenders are bringing to UK business lending.
It would be short sighted though to ignore the value of relationships in dealing with SMEs. I am a great believer that if all you do is lend you aren’t really adding value. We have set up a Business Growth Initiative Team that regularly speaks to our existing customers to see how their businesses are progressing and what issues they may need help with. It could be his best way to use social media, how to negotiate better payment terms or a whole host of other issues. We take the most common themes and on a specially created section on our website, called ‘Insights’, post a range of related articles and videos that provide valuable guidance. We are also keen to hear about other services our customers would value.
Customers tell us they welcome this approach as opposed to previous experiences of being lent money and then never hearing again from the finance provider.
This has a positive impact on customer surveys we run, with 97% of customers surveyed rating overall satisfaction and likelihood to recommend us as good/very good. Our customer surveys also provide valuable feedback on areas where we can further improve our service.
So banks and new entrants, friends or foe?
Alternative lenders are sometimes credited with disrupting traditional bank business lending in the UK but I don’t see it this way. One of the first questions we ask a prospective customer is; have they approached their bank as this, in many cases, will be the best option for them. However, it is clear that alternative lenders provide, as the name suggests, a range of alternatives if their bank cannot support their current stage of development.
Traditional banks with their scale, experience and lower cost of funding coupled with nimble alternative lenders employing the latest FinTech really compliment each other and meet the joint objective of helping UK SMEs to invest and grow.
I firmly believe a combination of finance provided by banks and alternative lenders, Government support schemes, more business education and businesses taking steps to make themselves more credit worthy will significantly increase the number of UK businesses that invest, grow and become successful.