My 2021 Predictions: Access to Finance

The last 10 months have been all about risk. Our health and our security have been the daily diet of limited conversations and rampant communications. Do we take lockdowns seriously and mitigate our exposure to the killer virus or do we plough through without painful excessive adjustment? Up until late January, I practised the latter, only to leave me infected and immobile for most of the month. Whilst bed bound and unable to work, I decided to reflect, reflect on the year that had passed and what it means for me, family, friends and my wider community.

I also reflected on what it meant for work and society in general. My first thoughts were on the death of George Floyd and so many others who are black. Those who took the risk to take a knee, raise a fist, join a march, state a solution and galvanise the energy to deliver momentum and make a movement. Then I began to think finance and small business and what this means for non-banking finance institutions nationally. As I’m sure you are aware, almost everything in finance is guarded and guided by risk. Yet 2020 was the year that our nation put cautions and risks aside to keep a crumbling economy together.

2020 in a nutshell
£70bn deployed into UK small businesses, triple the amount disbursed to small businesses in 2019 (House of Commons Library, 2021). From the outside looking in, statistics like this would give people reason to believe it was a good year for businesses and those involved in creating access to finance: however, many of us on the inside would beg to differ. Other than the introduction of BBL’s, CBILs and the other government intervention schemes 2020 for many in the funding space was scary. Lender loan books dwindled, Established entities closed their doors for good and despite having government guarantees, high street banks locked their coffers and left an untold amount of businesses in dire need. So, what does this mean for 2021?

Will we see similar funding volumes in 2021?
Well let’s see… despite a bleak 2020, 85,000 businesses were created last year, a 12.3% increase year on year, the highest growth on record till date (Smallbusiness.co.uk, 2020). Work from home and online retail opportunities remained the catalyst for such growth as quarantine and furlough presented the perfect opportunity for individuals to test their curiosity. All factors which have led to many experts forecasting that we’ll see just as much demand for finance from small businesses this year as we did in 2020.

Whether or not this is true only time will tell but with most banks closed for business until further notice and no word from the BOE on additional funding support for non-bank finance providers, demand for small business finance may remain high but the ability to meet and serve this demand remains a concern. A concern which could also be seen as an opportunity for those who are willing to plug the gap and get behind these businesses in need as the country builds back better.

The Rise of the Alternatives
The truth is, there has never been a better time for non-bank finance providers to grab market share from today’s high street banks. At present, 30% of small businesses access their funding online (Alt Fi: State of the market 2020) and this number could grow significantly if those in the alternative finance industry play their cards right.

Existing industry leaders like Funding Circle managed to take 20% market share of all CBILs disbursed last year ranking 5th amongst all providers including high street banks (P2P finance news, 2020). Whilst, smaller niche funding providers like Let’s do business and Business Enterprise fund also had record lending years due to the demand from businesses in their designated regions.

This growth in lending for traditional alternative finance providers coupled with the introduction of new forms of finance like ‘revenue-based finance’. A hybrid between debt and equity for businesses who are willing to offer a share of their future revenues for a fixed amount today, gives me reason to believe that alternative lenders could be the solution to the access to finance problems small businesses look set to face this year if the banks remain shut.

Funding the underserved: More niche funding providers
The death of George Floyd and findings from Covid which displayed the increased likelihood of those from BME communities catching the virus also led to discussions about more niche based finance providers. Not only within the alternative finance space but across the funding landscape in industries such as Venture Capital and Grant based funding. In 2020 we saw a number of corporates from Google to JP Morgan launch funding initiatives to support niche demographics but in 2021 I foresee funding houses being set up solely to champion these causes and communities. Not only due to the injustice which occurred in 2020 but simply due to the newfound demand amongst these groups.

According to research from the FSB, BME businesses contribute between £25bn to £32bn to the UK economy yearly, yet are still two to four times more likely to be rejected for finance in comparison to their indigenous counterparts (ESRD, 2015). Despite this, BME entrepreneurs are still starting businesses at a rapid rate - almost twice the speed of today’s white brit (GEM, 2017). Yet access to finance remains a problem. One which I feel alternative finance and other forms of finance like venture capital, crowdfunding or grant funding could help within 2021 if managed well.

Conclusion
From the stats above it’s clear to see that 2020 wasn’t all grim. We saw a significant growth in the number of small businesses birthed, record-high lending volumes amongst community lenders, had our voice heard as black and ethnic minorities and saw the coming together of conglomerates to support black business. Nevertheless, the facts still remain and whether or not the funding options I’ve mentioned above will be enough to tame the demand in 2021 is questionable. I’m optimistic but understand the case at hand, with BBL’s and CBIL’s ending early Q1 and banks still owning 80% of the small business relationships it’s hard to say whether my predictions will hold true. Hopefully, the introduction of CBILs 2 will give non-bank finance providers the confidence they need to remain bullish on the road to recovery.

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Definitions:
CBILS — Coronavirus Business Interruption Loan Schme
BBLs — Bounce Back Loan Scheme

References:
House of Commons Library, 2021- Coronavirus: Business loans schemes

P2P finance news, 2020: https://www.p2pfinancenews.co.uk/2020/09/24/revenue-up-but-losses-widen-at-funding-circle/

Economic Social Research Council, 2015: Supporting ethnic minorities and female entrepreneurs

GEM (Global Entrepreneur Monitor), 2017: www.gemconsortium.org/economy-profiles/united-kingdom-2