The British Business Bank, set up in September 2012, launched its Strategic Plan in June 2014 and revealed that more than £800 million of new lending and investment for smaller businesses has been realised after little more than a year of operations.
According to the Business Bank it has supported more than 30,000 businesses and 61% of the total funding provided to them has been from smaller or emerging finance providers – only 39% of the funding, in other words, has come from the four major high street banks.
The switch away from the banks as traditional sources of funding towards the alternatives promoted by the Business Bank may have been brought on by the reluctance of the banks themselves to provide adequate finance for small businesses in the UK but may also represent a sea-change in the way in which small and medium sized enterprises may be funded in the future.
At the last count, there were nearly 5 million smaller businesses in the UK, responsible for no less than 48% of the whole private sector contribution to the country’s economic output.
It might be noted, however, that the government’s definition of a smaller business is one that employs fewer than 250 employees and has an annual turnover of less than £43 million – this is probably a somewhat broad definition that may threaten to swamp the borrowing requirements of many much smaller enterprises with considerably lower turnover and employees of no more than 50.
How the Business Bank works and what it does
The Bank is currently run directly by the Department for Business, Innovation and Skills, headed by its Secretary of State Vince Cable. Towards the end of 2014, however, responsibility is to be transferred to a formally incorporated, government-owned company, the British Business Bank plc.
The Bank is intended to operate as a joint public private sector initiative and currently involves some 80 or so “finance partners” with the overall aim of increasing the supply of funding available to smaller markets by giving such smaller enterprises a greater choice of providers and more options when it comes to arranging the finance they need.
Expanding choices for small business is intended to help increase the overall level of business investment as a proportion of Gross Domestic Product (GDP). In the UK that proportion is currently only some 8%, compared with the 10% or so in other OECD countries such as Germany, France and the United States.
In setting up the Business Bank, the government appeared to have recognised that the traditional role of the banks in providing funding for small businesses was no longer working efficiently – hence the Business Bank’s reliance on 61% of new sources of funding from alternative, emerging suppliers. The drift away from the big banks and towards smaller providers of business funding is expected to continue, says the Business Secretary Vince Cable.
The Business Bank does not lend directly to small businesses but is involved in facilitating loans being made by others on the strength of the combined public and private funding of the Business Bank. Lending is needed from as many sources as possible, since 53% of businesses employing between 0 and 49 employees had their applications for loans from traditional sources (such as high street banks) turned down.
Sources of funding
If this drift away from the big four banks becomes the reality, there may be still more opportunities for those small business lenders currently offering loans of between a few thousand and up to £50,000 to companies in need of cash advances with the minimum of hassle and in the shortest possible time. An illustration of the way in which such lending works may be found online at business loans explained by Everline, who are just one of these growing number of short term lenders.
The ready availability of funding from such lenders may help to put into perspective the sometimes considerably more involved application procedures for businesses looking for finance that may have been facilitated by the Business Bank.
In order to broaden the diversity of funding opportunities for small businesses, the Business Banks claims to be able to facilitate the following kinds of debt financing:
- start-up loans;
- overdrafts;
- loans;
- peer to peer lending;
- asset-based financing (company assets offered as security, for example);
- hire purchase and leasing; and
- trade and export finance.
In a relatively short space of time, the British Business Bank seems to be proving itself in terms of new lending to small businesses. Nevertheless, the definition of a smaller business may be so broad that some of those at the lower end of this scale may still be missing out on opportunities for securing the finance they need.
