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Could SME-focused banks be the future of lending for small firms?

The lending options SME’s now have at their disposal is more varied than ever before, with numerous players offering innovative finance options. The availability of finance is crucial for these businesses to grow, diversify and in some cases, to simply survive.

Analysis by Purbeck Insurance Services recently found that 28 per cent of SME executives are turning to external funders to help them deal with late payments, which are often due to larger businesses they have done work for being slow to pay.

But despite SMEs employing 60 per cent of the UK’s private sector workforce and contributing half of British GDP, there is a £22 billion funding gap in the SME loan market, according to Bank of England figures.

Recent developments in the SME banking space should go some way to addressing that funding gap. One such development is the granting of a banking licence to Allica, a bespoke bank for SMEs, by the Prudential Regulation Authority. The PRA and Financial Conduct Authority will jointly regulate the bank.

While many challenger banks are targeting small businesses, they have done so while also offering products and services to individual customers. In contrast, Allica’s sole aim is to enable SMEs to develop their business by offering tailored support and financial expertise.

Small businesses haven’t been well-served by traditional business banking services. They often require businesses to secure approval before embarking on a new business venture, charge fees that rise exponentially with income, and don’t provide the flexibility businesses need to start working with suppliers or customers in different countries.

Banks likes Allica – which offer working capital solutions and cash management for small businesses, including loans, savings, payment services and asset finance – will therefore be welcomed by many small businesses.

Other sources of finance for small businesses are available. The British Business Bank’s Start Up Loans programme, for example has lent £500 million to UK small businesses via 63,920 loans since 2012.And Barclays recently announced a £14.7 billion lending fund to help SMEs through the uncertainty of Brexit.

In addition, the likes of small business lender iwoca that have been offering innovation in the small business finance space, such as real-time loan decisions. The Bank of England plans to create a new platform to centralise underwriting data to help small companies get loans.

But it could be that SME-focused banks like Allica will be the main source of finance for small businesses in the years to come.

The government-backed Banking Competition Remedies (BCR) scheme is making a concerted effort to improve the banking services small businesses have access to. As part of this, Metro Bank, Starling Bank and ClearBank received a total of £280 million from the fund in February, while Nationwide Building Society, Investec Bank and The Co-operative Bank were granted a combined £80 million in May.

With new virtual banks such as ePayments, Starling and Monzo also providing services that fit the needs of SMEs, the small business banking market will continue to become more competitive – something that small businesses looking for finance can only benefit from.

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Could SME-focused banks be the future of lending for small firms?
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