Banks are neglecting SMEs, alternative finance can be a lifeline

Across the small business landscape, there’s a sense that positive change is on the horizon. The Federation of Small Businesses has found that for the first time in two years, industry confidence has jumped 20 points owing to encouraging signs in the economy and hopes of long-term recovery. But, despite confidence rebounding, the industry still faces the same challenges to growth as before.

Small businesses shape our economy; they employ nearly 17 million people and turnover an estimated £2.4trillion each year. And yet, they face an uphill battle to build healthy cashflow and access capital to fund new jobs, build new products and expand into new markets. The financing gap is placing limits on what SMBs can achieve and this could have ramifications for the economy while stopping businesses from hitting their heights.

Data from UK Finance shows that small business lending dropped for a third straight year, from £18.4bn in 2022 to £14.3bn in 2023 (22%). It’s a trend that must be reversed so SMBs can realise their potential. Crucially, there are now alternatives to the traditional finance route. The scale-up journey does not have to stop on the say of a highstreet bank. Alternative financing, based on revenue or invoices, for instance, can be a critical lifeline, faster to obtain and provide the foundations to growth – every step of the way.

Funding freeze: Banks are getting cold on smaller businesses

It is no secret that banks are moving away from small business lending. It’s in the headlines every week: lenders “debanking” small businesses as high street banks prioritise larger enterprises or ‘safer’ bets in the market. With lenders closing more than 140,000 business accounts so far this year, there is a clear gap in both understanding how best to serve the SMB community and the opportunity it presents.

As small businesses rightly feel neglected by traditional institutions, they need to be asking themselves:

• Is this lender able to sufficiently support my scale-up journey?
• Am I seeing enough return to offset the lengthy approval times, stringent application requirements and underwhelming loan conditions?

The statistics speak for themselves. Small businesses need to embrace the break-up with traditional finance providers and understand there are other trusted alternatives available with providers that fundamentally get scale-up challenges, and are actively addressing the issues.

Alternative finance is the future of scale-up support

Alternative finance has become a key access point for on-demand small business capital. So much so that the British Business Bank’s Small Business Finance Markets report revealed that for the third consecutive year, challenger and specialist banks account for a higher share (59 per cent) of total gross lending than the big five banks (41 per cent), proving that it’s quickly become a default choice.

But, what has widened the appeal is the flexibility that new, and innovative, players in the market can now offer. For example, if an E-Commerce business spots an opportunity for investment with short-term demand – let's say, a £5,000 investment to manufacture 600 Stanley Cups that have grown popular overnight with consumers following a TikTok trend – alternative lenders can provide this capital within matter of days, rather than weeks.

Specialist lenders can also provide tailored support to new founders, with many focusing on early-stage businesses. This close relationship between lender and business, right from the very beginning, ensures that financing is perfectly aligned to both the business’ objectives but also to its growth runway. When the lender fundamentally understands the business, it’s easier to advise on how capital can help achieve their goals.

Helping SMBs to never settle

As alternative finance continues to gain traction, it’s paramount that SMBs understand the options that are available to them, and how this type of funding can power their scale-up journey.

Today, most digital-first lenders use technology to provide a best-in-class experience. This is in stark contrast to traditional banks who are still overly reliant on legacy processes that do not fit modern SMB requirements for capital.

Most founders and business leaders simply do not have the time to wrestle with paperwork, unnecessary process and rigid lending environments. Access to cashflow can be the difference between onboarding the new customer, purchasing key resources or expanding into a new market. That’s why market challengers use AI and automation to expedite the process, conduct fast, fair and transparent risk assessments, so applications can be processed in 48 hours – not weeks or months.

It's this technology environment that means SMBs do not have to settle for less. Financing options like revenue-based financing or invoice financing, whereby unpaid invoices can be converted into immediate working capital are grounded in emerging applications like AI to deliver flexibility and scalability when SMBs need it most. Capital becomes the springboard for growth, rather than an inhibitor to progress.

The SMB lending landscape is awash with legacy processes that are no longer fit for purpose. Too many banks neglect scale-ups and misunderstand the journey they are on. Against this backdrop, alternative forms of finance can be a lifeline. These financiers not only deliver flexible access to cashflow, but can work with SMBs to ensure capital injections match their growth ambitions. Small businesses are the engine room of our economy, and each individual business deserves no less than fair access to capital to support their success.