Responding to changing SME needs with flexible finance

With the Government taking action to open up more mainstream finance for SMEs, Ed Rimmer, CEO at Time Finance, explores the trends of the last five years and the emergence of more flexible forms of finance to keep the small business community moving.

It remains to be seen how the Government intends to stimulate SME lending from the high street banks, and if it will have an impact on growth. The moves being made by Rachel Reeves are definitely welcome; business loan success rates have declined over the past five years, falling from a pre-pandemic approval rate of 67% in 2018 to the current 50% success rate according to the Department for Business and Trade.

Our own research has revealed much the same. In a survey of 500 business owners, we found that 35% have been turned down by their bank for finance. Within that group, 55% were told they didn’t meet the criteria or affordability checks.

Risk aversion from traditional banks – undoubtedly fuelled by economic instability and defaults on the repayment of Covid recovery finance – is understandable. That said, being circumspect with lending can and has become a barrier for many businesses. Lending must be responsible, but it is easy to tip the balance into a situation where being overly cautious can stifle productivity and growth.

Flexible finance for SMEs

As an independent lender to businesses of all sizes, we’ve seen a real shift over the past five years to businesses wanting more flexibility with their finance solutions. Loans are familiar forms of finance but we’ve found many business owners have had open minds about different funding solutions that they didn’t necessarily know about but that can meet their cashflow needs. This is where Asset Based Lending (ABL) has become a valuable solution for many of our clients; its flexibility is a refreshing change to more rigid forms of finance. Yes, there has been a drop in loan success rates, but the bigger gap is in how restrictive traditional finance has become.

ABL, underpinned by a human underwriting process, allows a business to look inward at the assets they own, and help them turn those assets into working capital. It can facilitate bigger deals, enabling MBOs or investments in technology that move a business forward. ABL is flexible finance that can fuel growth.

Specialist finance for Midlands engineering firm

Earlier this year we packaged a £650k ABL deal for Speedflex, a Midlands-based engineering business that had its sights set on growth. The multi-product solution included a £250k Confidential Invoice Finance facility and a £400k Asset Finance facility. The key here was the consultative approach that meant Speedflex could take stock of its existing assets and factor these into its ABL package to increase borrowing power.

Of course, multi-product solutions are not for everyone, and there are many businesses that may need a more conventional and more familiar loan facility. It’s worth considering, however, that loans are short-term finance solutions whereas finance that is aligned to assets is a much more long-term solution that grows with a business. Either way, a consultative approach has become more valuable to the business owner than it was five years ago. Economics and politics – both globally and domestically – have become more complicated and unstable. This has given rise to uncertainty and as lenders, we can reassure and guide. It is not just about getting a ‘yes’ to finance, it’s going on a journey with a business to make sure they have the right type of finance for their circumstances.

The emergence of AI

It would be impossible to talk about how the world is changing for businesses without acknowledging the shifts brought about by AI. We, like many funders, are exploring how AI can change how we provide our finance solutions. Perhaps this has formed part of Rachel Reeves’ conversations with high street banks as a means of making finance more accessible to SMEs. My sense with AI and finance, as with most industries, is that we would be careless to ignore it, but we need to innovate in a responsible way.

Our aim as funders is to be easy to do business with, and that means if we can create efficiencies by adopting digital automation then we absolutely should. The objective here is to prioritise our responsiveness, not replace our people. For example, we have credit people that approve our finance solutions, not digitised tick boxes. Approving finance in this way means we can dig into a business’ credit history, its nuances and its ambitions. An automated application process can’t see or understand this level of detail. The businesses and brokers we work with value having a person to do business with. They like speed, there is no doubt of that, but not at the cost of connection, and those are the things we would lose if we let AI completely replace our personal and flexible approach.

We await the results of Rachel Reeves’ consultation with high street banks and how this will impact SME access to the finance they need to grow. However this is tackled, I’d personally like to see an acknowledgment that the business landscape has changed exponentially since 2020. Business optimism has taken some knocks, but it always fights back and I would like to see the business community rewarded with support that helps them thrive.