Basel Committee Proposals: Bad for Banks Good for Secondary Financiers

Since the economic downturn the banks have come under ever-mounting regulatory pressure, with the latest proposed rules being put forward by the Basel Committee - a Swiss based element of the Bank of International Settlements that sets international standards for banking supervision.

Since April it has pushed for an increase in the amount of capital banks and building societies must hold against certain loans.

Now a number of groups, including the British Bankers' Association and The Federation of Small Businesses (FSB), have weighed in urging George Osborne to lobby against the proposal, which they say will have a devastating impact on the country's SMEs and may 'derail growth in Britain'.

To a certain extent they are right, and I have written on the topic here before.

Small and medium businesses across the country continue to struggle to secure finance from the big banks, and the measures outlined by the Basel Committee will only push up loan refusal levels. 

However, the financial services landscape has changed remarkably in recent years.

The rise of the secondary finance market - incorporating services such as peer-to-peer lending and invoice discounting - has reduced SME's dependence on bank finance. 

As the saying goes, "one man’s loss is another man’s gain", and that holds true here for the banks and the secondary finance market.

One can expect that the introduction of the Basel Committee's new rules will provide a massive push for SMEs towards alternative financing solution.

The big issue at the moment is that many business owners are still unaware of the many financing vehicles available to them.

Despite the fact that the Government passed legislation earlier in the year obliging the big banks to advise SMEs that have been declined a loan of alternative sources of finance, the banks have dragged their heels - creating ridiculous hurdles for SMEs before they will share such information.

This is unfortunate as, in many cases, helping SME’s with alternatives offers a much-needed opportunity for banks to forge stronger relationships with their business customers over time -  ensuring that when they are better positioned to secure a loan, they will return to the bank that helped them.

In fact, we work with a number of bank managers across the country on this basis.

The result is that information that could spur investment and employment in our small businesses is not being shared, so the risk of stagnation rises.

There can be no doubt that there is an alternative financial solution out there for almost every business, but both Government and representative bodies - such as the FSB - must do more to support and educate their members.

Many SME’s looking for that illusive ‘bank loan’ already have adequate resources on their balance sheet to finance their expansion. The key is not usually finding more, but unlocking the value of assets they already own.

Inventory, Accounts Receivable, Plant and Equipment, Rolling Stock - in many cases all represent financeable assets, naturally assuming they are not already encumbered.

A lot of business owners don’t realise they have fixed assets that easily lend themselves to an asset Based lending approach, or even a sale and lease back through a specialist leasing company. Unlocking a block of capital and servicing the cost of that capital over two or three years is usually well within the reach of most expanding organisations.

Likewise, a company’s accounts receivable represent another liquid and valuable asset that can be turned into ‘cash’ in a variety of ways.

Accelerating cash flow can solve the majority of problems for growth-oriented companies. It is often said that any business that operates on a Cash-on-Delivery (COD) basis will win the day.  Most businesses can easily place their operations, or part of their operations, on a COD basis without impairing any customer relationships with Spot Factoring and Invoice Discounting type services.

More isn’t always the answer. Better utilisation of what you have can often solve the problem. That said, someone has to point the customer in the right direction.