You can imagine the scene. The members of Her Majesty’s Cabinet are sitting around an oval table in the gilded surrounds of Number 10 Downing Street. They are silently congratulating themselves on getting through the front door without insulting any police officers and are studiously avoiding the BBC apps on their iPhones in case they come across any news that might reveal the country’s economic outlook is even more depressing than they previously suspected.
“OK, everyone,” says the prime minster, with a firm rap on the table, “What we need is a big idea to get more funding to SMEs.”
“I know! I’ve got it!” Up jumps Vince Cable. “Let’s start a bank.”
A bank that lends money to SMEs. Wow. What a good idea. The Cabinet ministers nod thoughtfully at one another. Whoever would have thought of that?
This probably isn’t the only column you’ve read that has taken a humorous view of Cable’s announcement last month that the government is launching a business bank to provide finance to the nation’s struggling SMEs. It will inject £1bn of funds with another £9bn apparently coming from other (as yet, undisclosed) sources. We are, of course, talking about the very same government that already owns 82% of RBS and 40% of Lloyds.
Cable’s proposal seems to confirm that despite the widely-reported problems of the banking sector, banks still remain the government’s fall-back of choice. And who can blame it, in a way? Banks have been going about their business largely successfully for hundreds of years. But the world is changing and the trust that SMEs previously had in their banks has evaporated. Research by Hitachi Capital Invoice Finance found that while 43% of SMEs would seek financial advice from their accountant, just 21% would turn to their bank manager, with lawyers and independent financial advisers being more trusted.
The internet carries some of blame for this state of affairs, it seems. John Atkinson, head of commercial business at Inspired Cashflow, part of Hitachi Capital Invoice Finance, points out that “many SMEs don’t even know the name of their own bank manager, and since a lot of business is done online, there is no personal attachment or face-to-face interaction like there used to be”.
Yet, ironically, the internet also has the potential to transform the funding landscape to the enormous benefit of SMEs. Since 2005, there has been a steady stream of innovation on the funding front thanks to the launch of peer-to-peer lending platforms such as Funding Circle and ThinCats where prospective borrowers can auction their loans to lenders who are usually ordinary investors looking for a better return on their money than they would get from a high street bank account.
And it’s not just traditional loans that are available on the internet. Start-ups can seek equity investment through players such as Crowdcube and Seedr while MarketInvoice is a website that enables businesses to sell their invoices from large customers to investors to raise working capital.
At the moment, these financial innovators are only small players but their long-term potential is huge. They offer a simple, transparent, customer-friendly, low-cost service – quite the opposite experience of that many SMEs have with their banks these days. It’s no wonder, then, that the model is taking off and many accountants are increasingly recommending them to their clients.
To be fair to the government, it does have the financial innovators on its radar, but it needs to ensure that it is doing everything it can to support the sector’s growth through regulation and investment. Launching a business bank might seem like a big idea, but an even bigger one would be nurturing the innovation that is already being carried out by the man on the street, not the man in Downing Street.