|Alternative Funding Network|
Commercial finance brokers have traditionally played an important role in securing various types of finance for UK businesses. A qualified broker would help you search for the right source of finance, saving you time as a business owner to focus on growing and running your business. But the market for business finance is changing rapidly with an ever-growing number of online options developing, designed to make the process of securing business finance easier, quicker and much more accessible to the borrower.
How do these changes affect the role of the finance broker?
An increasingly diverse market for business finance might suggest an increased demand for qualified brokers, especially considering recent reports which show that less than 2 per cent of UK small business owners are aware of the funding options now available to them. This translates to 4.7 million businesses in the UK that do not understand the current business finance market. According to the National Association of Commercial Finance Brokers, as funding for small business becomes more complex, the advantages of using brokers are more pronounced than ever.
But there is a fundamental issue that may threaten their role in light of recent and future changes: a lack of transparency. The lack of transparency delivered by brokers can leave borrowers in a position where they don't understand the funding options at their disposal or the fees they are being charged. Some brokers charge in excess of 10 or even 15 per cent on top of the lenders' charges or, worse still, unscrupulous brokers may refer borrowers to unsuitable funders with their eyes set on higher levels of commission, instead of best matching the lender's needs. The lack of clarity in the process takes all power out of the borrower’s hands.
What are the alternatives for business owners?
With the connecting power of the Internet, almost every other industry has now been ‘disintermediated’ to overcome these kinds of issues. Travel agents have effectively been replaced by websites like Kayak and Skyscanner that have become synonymous with offering travellers greater choice and price transparency. You only need to look at the disruptive force companies like Uber are having to see what an online marketplace can do in another industry that until recently hadn’t been affected in a large way by the Internet.
This is yet to happen for business loans; but we may not be waiting much longer. The Government has announced its intention to support the creation of online platforms that match businesses that have unsuccessfully applied for bank finance with a range of alternative finance options. And it is not just the borrower that this type of platform can benefit. A quick Google search for the term ‘business loans’ will show the fierce competition and resulting ever-exorbitant prices Google are charging funding providers to acquire leads online (Google always wins!).
Online platforms have the potential to reduce the acquisition cost for funders - similar platforms developed in the US have used the same model to bring fees down to a standard 1.5-3 per cent broker fees, with fees made transparent to the borrower through the process.
So is there a role for the finance broker alongside these portals?
We have already discussed that a good broker can support the business owner with unique access to a range of business lenders. The complexity of business finance, particularly for larger deals involving a mix of funders, will always require manual expertise and experience. Faced with competition though from these online portals, finance brokers will struggle to charge 10 per cent commission without making this clear to the borrower. They will need to adjust their fees and their priorities, offering business owners greater transparency and finding ways to continue to add value to the process.
The extent to which online portals impact the broker will be seen over the next couple of years, but it is clear that as these platforms develop, more power will rest with business owners. Finance brokers will have to step up their game if they are to continue to add value in light of this competition.
By Elliot Gold