Trovus helps people find “treasure troves” of value hidden in their data, hence the name. The small, London-based company provides senior managers at large, global companies with dashboard tools for rapid data analysis. It was conceived as a service provider, but last year the company decided to try its hand at product development. To do so it needed money, so CEO Caspar Craven turned to his bank for a business loan. An investment-banker-turned-entrepreneur, Mr Craven describes the terms of the loan offer he received as “derisory”, and said no to the bank.
Instead of putting the company’s plans on hold, Mr Craven took the plunge with crowdfunding. Within an hour of posting on Funding Circle, a peer-to-peer financing platform, the company met its target. By the end of the week Trovus had raised £75,000 ($125,250) from 600 investors at a competitive rate. Able to fulfil its investment plans, the company’s revenues and profits soared.
Since the financial crisis British small and medium-sized enterprises (SMEs) have struggled to access finance through banks. Most entrepreneurs Mr Craven has spoken to, however, simply aren’t aware of the alternatives. There is also a fundamental problem with the way SMEs bank. They tend to get into long-term, monogamous relationships with banks: over half have been with the same provider for 9 years, and the four biggest retail banks hold more than 80% of business bank accounts.
What the financial crisis has drawn attention to, says Tom Thackray, a senior policy adviser at the Confederation of British Industry, is that relying so heavily on a few banks during the good times can be a serious danger when these run into trouble. SMEs have definitely felt the pain. Over the last two years net lending (loans minus repayments) to SMEs has almost consistently been negative. Those SMEs that have been successful in securing finance from banks have seen a steady rise in the cost of loans.
Filling the funding gap will certainly need work on the supply side. Here, the government has tried to help. Among other things, it set up Funding for Lending, a scheme designed to make cheap credit available for banks to pass on to borrowers. But the latest update on May 29th by the Bank of England showed that for the first quarter of 2014 far more was being paid back than was being borrowed by SMEs through the scheme.
There are handy ideas on how to fix the supply of credit across the pond. In the US just 25% of SME lending is provided by banks; in the UK banks account for over 90% of SME loans and overdrafts. Instead insurance firms and pension funds take centre stage in the US through the private placement market using bespoke lending agreements made directly with companies. Because institutional investors tend to provide long-term loans, they can reduce the cost of refinancing shorter-term loans for British SMEs and save them time. They can also be a godsend for medium-sized enterprises that can no longer rely on short-term loans and overdrafts. For the investors SMEs are more attractive than the moribund bond market.
To give these alternative lines of credit a chance, however, banks should be stripped of their monopoly over SMEs. Last year the government tried to inject competition in personal banking by making banks offer a 7-day current account switch service to customers. It is now starting to do the same for SMEs: on June 4th the Queen’s speech outlined the chancellor’s plans to force banks to refer small businesses they have turned down for credit to alternative providers. A next step would be to make banks unbundle business accounts and loans.
But for these initiatives to work, British SMEs need to change their banking habits, and stop relying on local branches and bank managers. Talking about how he had to overcome his own set of beliefs about crowdfunding being “flaky”, Mr Craven says SMEs need to be open-minded when it comes to borrowing. There are potential treasure troves of funding out there for SMEs. Those that fail to hunt for them cannot complain if they don’t strike gold.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
