By Steve Grice, Director
With several headlines emerging recently, highlighting the retreat of the main lending banks from the SME market, including:
"Business Borrowing from Banks drops £600m" (Bridgingandcommercial.co.uk)
"Business Banking: Are Big Lenders Doomed?" (themarketmogul.com)
We add our commentary:
Mainstream banks are on a long-term retreat from the smaller business market (sub £10m turnover).
We can see the beginnings of this currently, where many businesses are under-served by traditional lenders. However, there are some deep structural reasons why, within 10-15 years, most small business lending will be provided by non-mainstream, alternative finance sources, such as peer-to-peer lending.
The first reason is down to cost of servicing.
Because of their historic cost structures, it costs banks almost as much to assess a small loan than it does to service a large one; the difference in due diligence between assessing a loan request for £100,000 is not of an order of magnitude different from a loan request of £10,000,000 and yet the profits for the bank are greater on the latter.
This is why there has also been a long-term trend to credit scoring, de-skilling of bank managers and centralisation of relationship management into call centres.
The second reason lies in increased regulatory requirements.
Because banks now need to hold more capital against bad debts than hitherto, their internal costs for providing 'riskier' loans have increased. As small businesses are generally assessed at a portfolio level rather than individually, all lending at this level requires more capital reserves because the whole of this sector is seen as carrying greater risk.
We can already see some of the evidence in the way the lending market at this level has developed over the last decade. Funding options are now more varied, with many different lenders providing a range of structures, pricing and credit appetite.
Whether traditional funders realise it or not, banks are on a long-term retreat from small business lending.
Within 10-15 years, most funding for smaller businesses will be provided by the alternative sector.
Viewed from a strategic board level, banks will be content to exit what they see as an unprofitable and riskier market and will cherry-pick those companies which grow large enough.