Why We Can’t Bank on the Banks Anymore
In Europe, small and medium-sized enterprises (SMEs) generally go to the bank for money. In fact, bank loans are the preferred form of financing for 62% of SMEs across Europe. This is despite the fact that new bank loans to small businesses in the eurozone plummeted by 35% between 2008 and 2013. Before the British cries of “I told you so” can begin, bank lending fell sharply there too.
This should be big news for all of us, not just small business owners. Small businesses are the backbone of Europe: 99% of all non-financial companies in the EU have fewer than 250 employees and less than €50m in annual turnover. These engines of growth account for 66% of total employment and 58% of value added. However, because of their reliance on domestic markets and bank loans (more so than larger businesses), they suffered terribly during the euro crisis as demand and financing contracted. This goes some way to explain the stuttering growth of the eurozone in recent months. Nir Klein, in an IMF Working Paper, recently made a strong link between the importance of SMEs to certain European national economies and their difficulty in escaping recession.
Towards the end of 2014 there were signs that bank lending might at last be stabilising. According to the European Central Bank (ECB), between March and June of 2014 the conditions of a bank loan eased for all businesses, including small firms, for the first time since 2007. Interest rates became more favourable in Germany, France and Britain especially. Yet the European Commission’s SAFE report, published in November 2014, confirmed that while larger businesses may be finding bank loans easier to come by, smaller SMEs still faced a huge funding gap. More than one third of SMEs surveyed were unable to get the bank loan they needed; 13% of SMEs were rejected outright for a bank loan (compared to 11% in 2013); and the number of bank loans given to start-ups (1-9 employees) decreased by 8%.
When (if) Europe’s economy picks up speed, SMEs will naturally begin to generate their own resources again as demand improves. But they will also need new funding to continue growing, rather than just surviving. The question is will Europe’s banks – still struggling under bad debts and new, stricter rules about capital reserves – become less hostile to lending to SMEs, or will this trend continue?
The problems facing European small businesses are clear to both national governments and the EU, as shown by the recent flood of initiatives aimed at encouraging banks to lend more. Although helpful, according to experts this doesn’t address the real problem: under new rules, banks lack the capital to back-up risky SME loans. Nevertheless, last September the ECB pushed another €400 billion in their general direction.
Yet every cloud has a silver lining, so they say. The startling rise of alternative finance in Europe – the sector grew 144% to €3bn in 2014 – has helped to compensate for the stagnation in bank lending. “On this newly fertile soil a thousand private-sector flowers are blooming,” reported The Economist. 2014 saw an almighty proliferation of online funding platforms offering peer-to-business lending and equity-based crowdfunding. Interestingly, we’re starting to see SMEs use online funding platforms as their first port of call when seeking growth finance – as opposed to a safety net for when the bank says no.
Can alternative finance reach the scale required to replace conventional bank lending for SMEs? The exponential growth of the leading European crowdfunding and online lending platforms suggests, in time, it can. This is assuming lawmakers can keep up with the sector in creating the necessary pan-European framework.
With new financial technologies making it ever easier to manage assets online, platforms like Symbid in the Netherlands and Crowdcube in the UK are constantly improving their services to investors. The real task ahead of these platforms is to convince the 62% of European SMEs that still prefer bank loans about the legitimate benefits of choosing them over the more traditional route to financing. As our economies continue their gradual recovery and banks remain handcuffed by tougher capital requirements, it may only be a matter of time before “alternative” finance goes mainstream.
Considering that 39% of SMEs were rejected for a bank loan in the Netherlands last year – an EU-wide record – Symbid might just be in the right place.