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Opinion > OakNorth

Do SMEs favour equity and alternative finance over debt?

Joel Perlman, CSO at OakNorth | 16:58 Wednesday 7th March 2018

Improving the growth and productivity of SMEs is fundamental to enhancing economic performance .

At the beginning of 2017, SMEs in the UK accounted for 99.3% of all private sector businesses and 60% of all private sector employment in the UK.

Last year saw a substantial increase in the value and number of SME equity deals (up 79% and 12% respectively) in the UK, as well as continued growth in the value of SME asset finance deals (up 12%) and P2P lending (up 51%).

This was at the same time that traditional bank net lending declined to £700m – down from £3bn the year before.

Why do equity and alternative finance options continue to grow in popularity while traditional bank loans decline?

It generally comes down to time – business owners have very little of it and often don't start looking for growth capital until a few weeks before they need it.

Securing equity or undergoing a crowdfunding campaign can take just a few weeks, while P2P lending platforms can grant loans of several hundred thousand pounds in a matter of hours. This compares to traditional bank loans which typically take several months to complete.

Let's say you're the owner of a handful of bars or restaurants, and you've found the perfect site for your next opening, but the seller wants to close in the next few weeks – it's likely that you will go for equity or alternative finance rather than a traditional bank loan, because the loan is unlikely to be completed by the time you need the money.

There's also a perception among business owners that securing debt finance or a loan is harder than securing equity.

In fact, only 43% of small businesses are confident that they will receive a loan if they applied for one, even though 72% of applications are approved.

A big part of this might be down to the opaqueness in the lending process – typically borrowers are assigned a lending director who speaks to credit (the team that ultimately make the lending decision) on their behalf. The borrower is never given the opportunity to meet the decision makers or discuss their business with them directly.

That's why at OakNorth, we take a different approach: we aim to give prospective borrowers quick yes/no decisions and leverage a combination of fundamental credit analysis, data analytics, AI and machine learning to underwrite loans in a fraction of the time it takes larger lenders (weeks compared to months).

We also give prospective borrowers the chance to meet the credit committee – a somewhat more traditionalist approach that has proven to be hugely beneficial for both them and us.

In our view, debt finance should be one of the most popular forms of growth capital as it tends to be the cheapest – by making use of new technologies and taking a bespoke approach to lending, we could dramatically improve both the performance and perception of bank loans.

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