With some traditional financing routes currently unavailable, Marcel Le Gouais assesses the value of short-term borrowing options
It’s a question for every politician: how do you ensure that small businesses have the means to grow?
Business Secretary Vince Cable has taken this quest on with messianic zeal. In a bid to support fledgling business lenders who threaten the banks’ traditional hegemony, he is launching a state-backed, wholesale business bank with £1 billion to lend to small firms.
With funds matched by the private sector, it will support innovations, including peer-to-peer lending through which organisations lend to each other.
Commercial peer-to-peer lenders, such as Funding Circle, demonstrate the rise of alternative, short-term funding options for small and medium-sized enterprises (SMEs).
Since launching in 2010, it has funded more than £77-million of SME loans. Its website shows how transparency – borrowers and bad-debt levels are listed clearly – works in its favour. Peer-to-peer lending, however, forms just a piece of the puzzle. Many other solutions have emerged despite a slight lack of awareness about them.
Wonga.com doesn’t suffer from this problem. A campaign to promote Wonga for Business has sparked the latest provocative debate surrounding the company.
Foreign banks, including Sweden’s Handelsbanken, are prepared to lend competitively to UK firms
Only limited liability businesses or partnerships can apply for a Wonga loan, although there are plans to expand this. SMEs can borrow a maximum of £15,000 for up to 52 weeks with no early repayment charge and the cost of borrowing is displayed on the website. For example, if a company borrows £10,000 over 30 weeks, it will repay £393.33 each week, including fees and interest during that period, with a total repayment of £11,799.90.
Wonga for Business has experienced no defaults, but declines to say how many loans have been issued, or their total value, since its May 2012 launch.
Russell Gould, head of Wonga for Business, addresses the question of allowing customers to rollover loans. “If a business has a gap in trade and talks to us, then we’re relaxed about letting them skip a payment, as long as they can demonstrate that next time, payment will be made. The idea is to be flexible,” he says.
Mr Gould says the perception of cash-strapped SMEs approaching Wonga as a last resort is “not the case whatsoever”.
But Tony Murphy, partner at business recovery specialist Harrisons, says: “All Wonga offers is a sticking plaster – a short-term fix to a deeper problem that can’t be solved by throwing expensive short-term cash at it.”
Wonga for Business’ popularity can be partly explained by the difficulty for firms to extend overdrafts. Bank regulations, including Basel III, have put pressure on lenders to reduce balance sheets and therefore restrict overdraft facilities.
Mr Murphy adds: “It’s extremely difficult for SMEs to fund growth through bank overdrafts. Banks are being extremely cautious, with narrow criteria and preferred clients drawn from that hallowed turf of ‘vanilla deals’ - companies with strong balance sheets and net assets in excess of £2 million.”
Peter Black, managing director of Snowball Consulting, which helps firms access finance, says delays in getting a decision from banks on overdraft extensions are the biggest problem.
“Some SMEs fear that if they ask for an extension, the bank may pull the plug or cause upheaval by rifling through the books,” he says.
While overdrafts remain time-consuming, commercial bridging loans offer a faster route. Available for up to 12 months, they present an interim solution for SMEs before longer-term financing is secured.
Borrowers usually pay monthly interest, with rates starting at about 0.75 per cent a month and rising to 1.5 per cent. Fees should be carefully considered if an SME is borrowing only for two or three months; they could be more relevant than the interest.
Along with bridging lenders, foreign banks, including Sweden’s Handelsbanken, are prepared to lend competitively to UK firms.
Mike Cherry, national policy chairman at the Federation of Small Businesses, adds: “Reserves and retained profits are the best way to fund short-term cash requirements.”
While both are precious commodities in a recession, SMEs might take encouragement from a forecast rise in short-term lending. Members of the Association of Short Term Lenders had £974 million of bridging and short-term loans outstanding by September 2012, a figure the trade body expects to increase.
But it might take several years for burgeoning lenders to take market share away from the banks. Vince Cable is staking his reputation on them doing so.