Updated 03 December 2020
A leading challenger bank has unveiled plans to lend £400m to small businesses, offering a welcome boost for those seeking funding. But with so many potential financing options available, entrepreneurs need to choose carefully. Article by Nick Green.
One of the UK’s foremost digital challenger banks has announced ambitious plans to pump investment into the nation’s small businesses. Cashplus, which launched in 2005, will begin a £400m programme of lending once it becomes a fully authorised bank in the first quarter of 2020. With some 250,000 customers including 75,000 small business accounts, Cashplus has built up deposits of half a billion pounds, which it will be able to draw upon as lending capital if its banking licence is approved. Chief executive Rich Wagner has said that his aim is to lend out to ‘overlooked SMEs’ and secure 10 per cent of all new UK business accounts by 2024 (currently Cashplus has a 7 per cent share).
Cashplus business accounts have proved popular with start-ups due to the streamlined application process with no credit checks. Business accounts with mainstream banks have around a 40 per cent refusal rate, due to the rigorous financial tests which many entrepreneurs struggle to pass. Another advantage is that business customers can conduct cash transactions at Post Office counters, removing the need for physical branches. Rich boasts that thanks to the 11,000 branches of the Post Office, Cashplus has a physical presence ‘bigger than all the high-street banks combined’.
For some years, small business funding has been hitting roadblocks in the traditional banking system. The government-owned British Business Bank (BBB) has estimated that SMEs are missing out on around £4bn a year in refused loans, usually because they fail to meet the tough criteria set by high street banks. Yet the Hampshire Trust Bank and Centre for Economics and Business Research puts the economic contribution of these businesses at around £200bn over the next five years – a figure that could be larger still if more funding were made available.
Most lending by high street banks is to larger businesses with long track records of profitability – ‘safe bets’. The BBB believes that some 38 per cent of small businesses abandon their growth plans after just one refusal of bank funding. The good news is that these startups now have options beyond the high street, ranging from challenger banks to peer-to-peer lending. However, this doesn’t necessarily mean a return to the time of cheap and easy finance. As the lending market becomes more diverse and competitive, entrepreneurs need to think harder about who they are borrowing from, and what risks this might involve.
Figures from the BBB show that peer-to-peer lending to SMEs hit nearly £1.8bn in 2017, having grown by 51 per cent in that year alone. This rapid increase shows the scale of the exodus from traditional banking towards less rigorous lending – but leading figures have questioned the sustainability of this. Ian Rand, CEO of Barclays Business Banking, has warned of a potential bursting bubble, comparing the phenomenon to that of Wonga lending to consumers who couldn’t get bank loans. ‘That didn’t work out too well for them, or for Wonga,’ he said. ‘I am nervous that we could be going down the same path with business lending.’ One of his key concerns is that the new lending providers do not have the same ‘duty of care’ as traditional banks, in the event that small business customers struggle with their repayments. He also voiced fears that some fintechs may simply choose to sell the debt on to another provider, rather than work with the business to help it overcome its difficulties.
Leading peer-to-peer provider Funding Circle hit back at this suggestion, saying, ‘We don’t write down debt or sell it off, as investors expect us to maximise their returns by recovering as much as possible over the long term.’ Funding Circle also has a Collections and Recoveries team that works with businesses who struggle to repay, much in the same way as traditional banks do. Another SME lender, Spotcap, takes a similar approach. ‘We don’t – and never will – sell our debt on to third parties,’ says managing director Niels Turfboer. ‘Over the years, we have developed several hardship solutions such as payment holidays, but also offer more bespoke repayment plans to support our clients.’
Despite such reassurances, peer-to-peer lending still carries a greater degree of uncertainty than traditional lending, and is relatively untested through times of financial crisis. One troublesome issue can be the time it takes investors to recover their money. Currently there is an average three-month wait for investors who want to withdraw money from Funding Circle, and sometimes there are additional unexpected delays – which may be due to business borrowers failing to repay on time, or to a lack of other investors willing to buy the loans. Business analyst Collin Ryder wanted to withdraw all his money (around £6,000 pounds) in July 2019, only to face a wait of over 108 days.
Not all peer-to-peer lenders use the same model as Funding Circle – some split up the investments to spread the risk and make prompt repayment easier. But such stories can be off-putting for investors, which in turn may end up limiting the funds available for small businesses to borrow, or the terms of that borrowing.
Ultimately, business borrowing from alternative providers such as challenger banks and peer-to-peer loan companies is a lot easier – for now. It remains to be seen how long they can maintain their looser lending criteria through economic bumps and dips, and whether they too will eventually be forced to take a stricter line.
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