SMEs: Bank loans are far too expensive
Businesses seem to be put off bank loans and prefer to use cash flow for growth

It seems that UK business owners find it

too expensive to borrow cash from their bank. Why aren’t the banks adjusting to online competition?

A study by C2FO finds that more than a third of UK small and medium-sized enterprises (SMEs) state that it’s too expensive to borrow, if they are even approved in the first place, with a majority financing themselves with cash flow from operations.

According to those businesses surveyed, only 30 per cent of SMEs in the UK are able to borrow for an APR of under 6 per cent (versus 50 per cent in the US). Those in the financial services and insurance industry are borrowing at the highest rate, at an average of 7.2 per cent.

The survey also shows that those companies finding it cheaper and easier to borrow tend to pay their suppliers more promptly.

It’s surprising to observe banks continue to fail to adjust to competition from alternative lenders. It’s not as if banks aren’t aware of the growth in options such as peer-to-peer lending. In fact, last summer saw new legislation forcing banks to refer companies they turn down for loans to other sources of finance. This should give them plenty of opportunity to keep a beady eye on the competition.

True, banks cannot assume the risk these other platforms do due to regulations and other factors, but whereas a couple of years ago one might have argued that the value of a more personal, meaningful relationship with a commercial bank manager, for example, might have negated the sterile, computerised online approach, the sheer range of options and degree of sophistication that online lenders can bring seem to tip the balance in the favour of the new kids on the block.

More than half of SMEs (61 per cent) are increasingly concerned with their ability to finance long-term growth over short-term growth (39 percent) and over the past 12 months, 40 per cent of UK SMEs experienced an increased need for working capital.

In order to access the working capital needed to fund business growth, evidence shows that many businesses have moved away from traditional forms of financing and are leveraging the cash flow from operations to fund their growth (59 per cent).

This suggests that the importance of raising a prescribed chunk of money could be waning now as exasperated business owners prefer to take their chances with reinvesting profits back into the business to steer their growth aspirations.

In this case, we can surely expect the saturated alternative finance market to lose a few names. Maybe when the smoke clears, a more streamlined list of online competition will suit the banks after all.

Further reading on banks and alternative lenders

Changes afoot in the alternative lending market

See also:Securing an overdraft