Traditional lending has changed. The past few years have seen thousands of banking branches being forced to close shop, with a record 802 branches closing in 2017 alone, according to The Times. And it seems as if the pace of cutbacks to banking services is likely to accelerate over the next few years.
The changing banking landscape has had a significant impact on SMEs. Many have lost access to traditional bank managers and, with this, the knowledge, experience and ability to see beyond the raw data that is so crucial to providing small businesses with the funding they need to fuel their growth and success.
The statistics continue to stack up: a 2016 report from the Federation of Small Businesses estimated that 1,500 previously banked towns had become branchless. Banks are compensating for the loss of these branches by increasingly channeling customers down digital routes. While numerous small businesses are embracing the shift to digital services, with 94% of SMEs using internet banking, there is still huge value in being able to have a face-to-face conversation. This is particularly true when businesses are making important decisions about the future and are looking to raise finance.
A recent report from Close Brothers, the merchant-banking group, showed some of the consequences this decreasing access to experienced bank managers has had. For instance, 12% of lenders didn’t understand the sector and 10% didn’t understand the borrower’s individual needs, so it’s hardly surprising that only a fifth of SMEs say their bank’s advice always meets their needs.
Digital processes present a double-edged sword; algorithms enable a huge amount more data to be processed, but they can only deal with the data provided in the manner in which they are programmed. At the moment, only a human can nose around the office or factory floor, get a real feel for the business, distinguish between the qualitative factors that make businesses distinct and therefore give a thorough and balanced assessment of a business’s situation.
The landscape may be shifting, but the good news is that many of the most experienced bankers have moved into the alternative finance sector. Many are now actively working for alternative funding providers or as specialist commercial finance advisers. The result is a range of funders who can give a personal and professional service with great local and industry knowledge, without the overhead costs and bureaucracy of the traditional lenders.
Likewise, accountants and commercial finance brokers have recruited many an ex-bank manager, many of whom work in partnership with alternative finance providers, harnessing a huge wealth of finance and business experience outside the banking network which SMEs can now tap into.
This different way of working means that the provision of finance can be flexible, reflecting the individuality of each business. Deals can be considered on their own merits, and different types of security can be considered to provide collateral. For lenders providing secured loans this doesn’t necessarily have to mean physical assets as stable and diverse cashflow can also be valuable.
It marks the return to having a proper, personal relationship with local business experts, who are genuinely interested in their clients’ business growth – a role that the banks used to play.
The banks have also become increasingly restricted since the financial crisis, and regulation has put them under immense pressure to maintain higher capital ratios and to de-risk their balance sheets. As a result, more and more SMEs are falling short of the different banks’ lending criteria, fuelling the funding gap.
Fortunately, this gap is starting to be filled by the alternative lenders, many of whom are scooping up the traditional finance experts and putting their considerable expertise to good use, supporting SMEs. 
This feature comes courtesy of ThinCats, the alternative finance provider.
