EU uncertainty ‘could hit SME finance sector’

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The current “revolution” in funding for small businesses could be derailed by uncertainty over Europe, a turnaround specialist has warned.

Adrian Doble, partner at FRP Advisory, said challenger banks, foreign pension fund investment and technology-driven lending had given businesses more opportunities to access funding outside of traditional banks.

However, the months running up to the Scottish independence referendum saw a slowdown of investment that could be replicated in the event of continued uncertainty over the EU, he said.

Speaking at an alternative lending event hosted by Legatus Law, Mr Doble said: “What happened in Scotland for the six months before that vote is indicative of what could happen in our space and we need to be mindful of what the damages are.

“Investment stopped. Nobody wanted to lend into a business sector that might not be part of the UK six months later.”

Uncertainty over the UK’s future within Europe has made business “very politically sensitised” to a possible referendum, he said.

“We ought to be looking at the potential consequences of a referendum that creates an environment where nothing happens in the UK.

“We have probably at this point in time got the most vibrant economy in Europe and I think we could quickly move to having quite a stagnant set of circumstances if our Government doesn’t deal with this whole European issue very quickly.”

Mr Doble said he makes “no judgement” about whether the UK should leave the EU, but that the question has a “knock-on effect” that must be considered.

US-based pension funds, which have been “desperate” to invest in small businesses through peer-to-peer lending and similar platforms, could withdraw from the UK market.

“If you look at those American funds, where are you going to place their money?

“They’re not going to evaporate from London but they’re not going to put it in the UK economy. What they’ll do is take it to Germany or Spain, where there’s a resurgence going on,” Mr Doble said.

Interest rate rises also pose a threat to the availability of SME finance, as the increasing cost of finance for larger corporations could squeeze liquidity in the market, he said.

Despite the uncertainty, Mr Doble said the alternative finance sector for small businesses is thriving.

Challenger banks like Metro, Shawbrook, Handelsbanken, Aldermore and TSB are attracting business from the banks by “doing things slightly differently”, while the flow of institutional investors into new platforms such as peer-to-peer lending has opened the sector up, he said.

“There is probably more choice than there ever has been for a small business looking to raise relatively high-risk spending that would not have been available five, four or even three years ago from the traditional banking sector,” he added.

The panel, which also included Reward Capital managing director David Jones, Pulse Cashflow Finance’s chairman Nick Sellars, Platform Black managing director Caroline Langron and Funding Circle and Funding Circle head of collections and recoveries Andrew Jackson, was split over the threat of future regulation.

While Mr Jones and Mr Sellars said a drive towards ethical practices from within the sector would be favourable, Ms Langron and Mr Jackson said platform-driven lenders welcome future scrutiny because of the greater comfort it provides investors.

Ms Langron said: “We welcome regulation. It probably will come for our side. I hope it doesn’t restrict us getting money out the door, but we welcome it.”

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A bill that will make it easier for small businesses to find alternatives to bank lending is close to being signed into law.

In December, the Government confirmed it would press ahead with the Small Business, Enterprise and Employment Bill.

Among its measures, the bill includes plans to ensure SMEs are put in touch with other lenders when rejected by the bank, provided the company has given permission.

Last week, the bill passed its third reading in the House of Lords. It will now return to the Commons for consideration of amendments.

The bill also includes plans to clamp down on the late payment of invoices.