Ulster University Business School published some research earlier this year on the perceptions of banks and small businesses about crowdfunding. It makes interesting, if at times rather depressing, reading.
The starting point is that the pattern of small businesses borrowing in NI is very traditional. Over half is from banks, followed by credit cards and friends and family. 86% of our SMEs said they never use external private equity. Or to put in another way, the survey suggests that our companies still believe in borrowing instead of giving away shares, normally a great way to restrict growth.
Research actually showed that 50% of SMEs had not applied for loan funding over last 3 years. However, to the credit of our banks there was a 75% success rate for those who did.
The report summed this up by saying that ‘SME respondents shared a generally withering view as to the usefulness of banks in the start-up space.’ And that relationships between SMEs and banks have entered a new phase of decline over recent years.
So not a very pretty picture here.
This however was only the starting point. The real purpose of the research was to examine how crowdfunding fits into this picture. After all, in the UK, crowdfunding or alternative lending provides 3-5% of SME lending.
The companies generally liked crowdfunding as they perceived banks as being too risk averse and cautious. Or worse, had a perception that they don’t lend to SMEs – even though this is statistically just not true. Bank processes are also seen as slow while crowdfunding, at its best, can be remarkably quick.
SMEs who have raised orders by reward-based platforms like Kickstarter, believe that the banks don’t give these sufficient credence. This shows, they believe, that banks just don’t get crowdfunding.
For the banks, they appear to have a love hate relationship with crowdfunding including peer to peer lending. They will say it has its place in the market but really in funding projects that are more niche and higher risk than traditional lending could support.
The banks also don’t see crowdfunding as a big threat at the moment, but do point out that it hasn’t been going long enough to have been through a whole cycle yet. They’re waiting to see, as losses and even some scandals mount, whether the whole ethos could be damaged.
Interestingly, the banks see their biggest differentiation as local personal contact. Something crowdfunding will always struggle to match.
So, overall, not a particularly happy picture in NI.
However, there is a bit of a game changer in the unlikely form of the Small Business Enterprise Employment Act 2015. This means that banks must now re-direct companies, where they have decided not to provide funds, to other sources of finance. And these other sources must include crowdfunding.
This is still in its infancy, the latest figures show that of the 100,000 SMEs ‘rejected’ by banks, only a quarter were referred on. However one of the biggest peer to peer lenders, Funding Circle, has already set up a referral partnership with Santander.
If, or perhaps I should say when, our banks in NI start doing this, it can only improve the clearly strained relationships between our smaller companies and our banks.
Alan Watts is the Director of Capital Match at Catalyst Inc (formerly the NI Science Park).
For more information about Capital Match or to contact Alan, go to www.capitalmatch.catalyst-inc....