Is alternative finance a better route for your SME clients?

But for 1 in 5 small businesses, access to finance is a major obstacle to growth[1]. And it’s not hard to see why when just under half of all business loan applications to banks are unsuccessful[2]. Banks’ risk appetites are set by tight regulatory rules and shareholder objectives. For many, making small value (<£150k) loans to small businesses isn’t profitable. And a purely online, algorithm based approach to lending can mean that viable SMEs without a track record, credit history, or sufficient collateral have to give up on investment and growth.

But there is a solution: the UK’s network of Community Development Finance Institutions (CDFIs).

94% of CDFI customers have been declined by a bank before going on to successfully apply for a loan with a CDFI. CDFIs can turn a “no” from a bank into a “yes” by getting to know the business. They supportively look under the bonnet, like a mechanic hoping a quick clean is all that’s needed to get you back on the road. And they take into account soft information when making lending decisions, like the strength of your management team, and whether you can show you’ve learnt from past challenges and are stronger as a result.

One example of a business supported by a CDFI to thrive is outdoor equipment manufacturer and retailer Alpkit. Since borrowing from a CDFI it has grown from 12 to over 100 employees, opened new stores across the UK, become B Corp certified and is on track to grow to £7m in international sales. A mainstream bank couldn’t provide the finance Alpkit needed to grow but referred it to First Enterprise, a CDFI which was able to support its growth through two loans.

Alpkit can borrow from a mainstream bank now. CEO David Hanney said:

“First Enterprise have been brilliant for us. We’re a small enterprise, small brand and raising finance is hard with banks particularly when your business is a bit outside the normal. The process [with First Enterprise] was really simple. We spoke to their advisers who came to see us and helped us through the whole process of writing an application form. They’ve been very helpful for our overall growth.”

CDFIs break down barriers in access to finance by lending to fill the gaps in mainstream provision for businesses and entrepreneurs, as well as focusing their lending across the regions of the UK:

• 93% of CDFI loans are made outside London and the South East
• 46% of CDFI lending is in the UK’s 35% most deprived areas
• 13% of loans are made to ethnic-minority led businesses, whereas only 6% of UK SMEs are led by ethnic minorities
• 35% of loans are made to women-led SMEs, whereas only 16% of SME employers are led by women[3]

CDFIs are proud to partner with the Government-backed British Business Bank to break down barriers in access to finance. It recently said of the sector:

“The British Business Bank continues to partner with lenders committed to improving access-to-finance conditions for businesses in the UK's most deprived areas. Community Development Finance Institutions (CDFI’s) are key components of the finance ecosystems in such areas, with nearly half of CDFI lending going to the UK’s 35% most deprived areas. Evidence suggests CDFI’s outperform banks in lending to such areas. The Bank is committed to helping businesses and entrepreneurs access the finance they need to grow, and has partnered with CDFI’s in various programmes, including NPIF and MEIF, Start Up Loans, and RLS.”[4]

So if your clients want to grow perhaps their nearest CDFI could give them just the financial spark they need.

 A CDFI is a non-profit lender that provides debt finance and support to businesses through a relationship-based approach to lending. The loan is repaid with interest, along with any agreed fees over a set period. CDFIs generally lend amounts from £25,000 up to £250,000, but some will lend from as little as £1,000 and above £250,000. Find your nearest CDFI here: https://www.findingfinance.org.uk/

[1] Longitudinal Small Business Surveys 2015 and 2019, Employers and Non-employers, Question G2.

[2] Federation of Small Businesses (2022) Small Business Index.

[3] Responsible Finance (2022) Loans That Change Lives

[4] British Business Bank (2022) Nations and Regions Tracker