Business banking: what are the alternatives to the high street banks?

Bank of EnglandAccording to a YouGov poll, 18% of small businesses want to move banks. Inertia may be holding some of them back, but there are some very compelling alternatives to the high street banks, as Rachel Miller explains

The figures on lending to small firms speak for themselves. The Federation of Small Businesses (FSB) has reported that 41% of small firms were refused finance by the high street banks in the second quarter of 2012.

Meanwhile, the same banks are more than happy to have business customers paying for their banking services. A report published by CashFlows says that business banking transaction fees are an estimated £2.3bn a year.

High charges and a lack of funding — not to mention a deep dissatisfaction with the banks’ general conduct — mean that many small firms are not happy with their business banking arrangements. Results from the recent YouGov SixthSense SME Banking Report indicate that 33% of the UK’s SMEs have complained to their banks in the past two years.

And the report shows that 15% of SMEs tried to switch provider in the past two years, but only 8% succeeded. “Smaller businesses appear to be suffering in silence over this issue,” says Simon Mottram, director of financial services consulting at YouGov.

“A total of 23% of those SMEs that believe there are better banking options available in the market either lack the time to search for them, don’t know where to look, or feel it’s too much hassle to change,” he says. “So in the next two years, just 18% of SMEs indicated they were likely to switch their main account provider.”

But there is another way. Alternative sources of finance are emerging, ethical banks are increasingly popular, peer-to-peer funding is growing fast and new savings and loans providers aimed at small businesses are being launched. In addition, plans are being drawn up by the Government for a dedicated business bank.

Making the move

Set up in 2004, millinery and accessories designer Simply Devine is owned and managed by mother and daughter, Joy Devine and Liz Devine-Wright. The Tadcaster business changed banks in order to cut costs and get a better service, and chose the Co-operative Bank.

“We transferred when our start-up free banking with another bank had expired and it started charging what we thought were excessive amounts. And I can honestly say it's one of the best business decisions we've ever made,” says Liz Devine-Wright.

“We enjoy free banking. We don't pay bank charges for simple things like paying money in or taking it out — in fact The Co-operative Bank gives us money in the form of a loyalty bonus on our anniversary date. And I'm happy to say we also receive interest every month.”

Ethical banking

Like the Co-operative Bank, Triodos is an ethical bank that is increasingly attracting business customers — it saw a 36% rise in lending to business in 2011 over 2010.

Top London recording studio, The Premises Studios — used by the likes of Macy Gray and Madness — chose to take its business to Triodos because it was dissatisfied with Barclays. “As a business we’ve always done what we can to act responsibly and we decided that banking with Barclays was no longer a viable option for us,” says Julia Craik. “Once we’ve switched our banking we can tell our clients that any money they pay will be going into a sustainable model of banking, and in the current climate this gives us a great business edge.”

Bevis Watts, head of business banking at Triodos Bank, says things are changing. “Businesses are beginning to vote with their feet and increasing numbers are choosing to borrow from or bank with those providers where they know their money can have a real, positive impact.”

Newcomers

In terms of brand new banks, there’s only one new name and that’s Metro Bank. It’s the UK’s first new high street bank in over 100 years. With 12 “stores” in and around London and plans for over 200 by 2020, Metro Bank offers long opening hours, online banking and free card transactions abroad. It aims to attract small firms and start-ups with business banking facilities, as well as overdrafts and loans, and is part of the government-backed Enterprise Finance Guarantee (EFG).

Small firms looking for alternative places to borrow or save can also take advantage of one of the new breed of savings and loans providers aimed specifically at SMEs. These include Aldermore, Shawbrook Bank, Cambridge & Counties Bank and Burnley Savings and Loans (the “Bank of Dave” as seen on Channel Four).

“It’s great to see more and more challenger banks and alternative lenders entering the market,” says Philip George, interim CEO of Shawbrook Bank. “We launched Shawbrook because we believe there’s a need for a bank that does things differently. The response we’ve had since we launched has been fantastic, and shows the demand for honest, common-sense banking really does exist. Shawbrook and other new entrants offer choice, opportunity and optimism to small businesses and individuals who are fed up with lack of choice and poor service on the high street.”

Shawbrook Bank has helped people like Alison Leigh who previously struggled to get funding. Alison wanted to buy her village pub — the Crooked Billet Inn in Lancashire — but had been turned down by several high street banks, despite a solid business plan, sector experience and capital for a deposit.

Peer-to-peer funding

Perhaps the most radical new arrivals are crowd-funding websites aimed at matching small investors with start-ups and growing businesses. Sites like Funding Circle and Crowdcube allow businesses to pitch for funding. Investors can put in as little as £10 and receive interest and even shares, depending on the success of the business they fund.

Andrew Denham chose this method of raising finance when he set up his Bicycle Academy business offering affordable bike-building courses to cycling fanatics. He told his story to Radio 4’s In Business programme.

“We had six weeks within which we needed to raise £40,000 — we actually raised all of the money within six days,” Denham said. Donors to the Bicycle Academy received a T-shirt if they pledged £20. Higher donations secured places on bike building courses. In all, Andrew got his funding from 183 people and as he points out, they are not just investors but have become evangelists for his business.

However, the FSA has warned that crowd-funding should “be targeted at sophisticated investors who know how to value a start-up business, understand the risks involved and that investors could lose all of their money”.

But the idea that investing in businesses should be the preserve of so-called “sophisticated investors” has angered many, including Barry James, CEO of Angel Revolutions who says, “No one is compelled — or put at risk — other than by their own choice for an amount, usually a very small amount, of their own choosing. Crowd-funding is a little like a lottery. The stakes are small and self-selected. Yet it has inestimably more power to benefit our economy at a time we badly need it.”

One thing’s for sure, more choice and competition has got to be healthy for small businesses — giving them a better chance of securing funding and getting the best possible service from their bank or lender.

Alternative sources of funding and banking

THE NEW BANK

Metro BankMetro Bank

USP: Promises high levels of individual service for businesses. Craig Donaldson, CEO of Metro Bank says, “We are committed to helping SMEs grow in what is a very tough economic climate.”

Banking: Current and deposit accounts for businesses, including online banking.

Lending: Overdrafts, business loans, credit card. 

ETHICAL BANKS

Triodos BankTriodos

USP: Triodos only lends to organisations delivering social, environmental or cultural benefits. Customers include Ecotricity and River Cottage. Its business banking customers must have an ethical approach.

Banking: Internet banking, direct debits, CHAPS and foreign currency transactions. Ethical savings accounts.

Lending: A variety of business loans including overdrafts commercial mortgages, cash flow lending, term loans and working capital loans.

Co-operative BankThe Co-operative Bank

USP: An ethical bank with a five star service promise. Businesses can access their accounts by phone, in branch, by post, online or at Post Offices.

Banking: A range of business current and deposit accounts, including FSB Business Banking offering free banking and a fee-free formal overdraft. Chris Berrington, head of corporate relationship and business banking, says: “Since 2007 we have increased our lending to businesses by more than 40%. We remain the only major financial services business with an ethical policy. It is also significant that almost 30,000 Federation of Small Businesses (FSB) members choose to bank with us.”

Lending: Business charge card, overdrafts, fixed and variable rate loans.

SAVINGS AND LOANS PROVIDERS

AldermoreAldermore

USP: A strongly-funded bank committed to supporting small to medium sized British businesses, helping them to manage cashflow and find accessible capital in order to grow. Launched in May 2009, the bank already has 70,000 savers, £2.1 billion of assets and over £850 million of existing loans to SMEs, underpinning its claim to be the UK's fastest growing bank.

Services: Online business savings accounts, commercial mortgages, invoice financing, asset financing.

Shawbrook BankShawbrook Bank

USP: A specialist savings and lending bank committed to making it easier for SMEs to grow. The bank has built a base of 18,000 loan customers and 18,500 savers. Launched in October 2011, it has already reached break-even point.

Services: Commercial mortgages, loans and asset finance as well as business notice accounts and fixed term deposits.

Cambridge and CountiesCambridge & Counties Bank

USP: Jointly owned by Cambridgeshire Local Government Pension Fund and Trinity Hall, a College of the University of Cambridge. Offering SMEs a personal approach using business development managers, focusing on Cambridgeshire, Northamptonshire and Leicestershire, coupled with a national broker coverage model.

Services: Commercial mortgages, business loans (£50,000 to £1m), business savings accounts, professional firm financing and secured pension lending.

Burnley Savings & LoanBurnley Savings and Loans

USP: Owner Dave Fishwick, the tireless entrepreneur determined to offer an alternative to high street banking.

Services: Business and vehicle loans, refinancing and savings accounts. One branch. Loans are only offered to businesses in Lancashire.

PEER-TO-PEER LENDING & CROWD-FUNDING

Bank to the Future

USP: The world’s first social media-driven financial institution, it allows entrepreneurs, businesses and investors to raise finance and invest in each other. It evaluates customers on their social media “capital” on Facebook, Twitter, Linkedin and Google+, not just on a credit rating. Businesses must demonstrate the potential to create jobs. Investors receive interest as well as shares and rewards.

Funding Circle

USP: An online marketplace to help businesses find fast finance, and investors get better returns. More than 700 businesses have borrowed money to date and £50m has been loaned.

Crowdcube

USP: Allows consumers to back small businesses and start-ups through stakes of as little as £10. 24 businesses have raised more than £3.9m via Crowdcube. Those who do not reach their set target are not allowed to keep any money pledged. 10% of Crowdcube business pitches reach their funding goals.

Crowd-funding sites aimed at creative people and businesses include Please Fund Us and Kickstarter, the successful US site coming to the UK in the Autumn.

ASSET LENDING

Borro

USP: Founded by Paul Aitken in 2008, Borro is the world’s first online asset lender. It provides short-term loans from £1,000 to £1m secured against a range of high net-worth assets, from jewellery to yachts and artworks. The average Borro loan to small business owners, entrepreneurs and the self-employed is £20,000.

SHORT TERM BORROWING

Wonga for business

USP: A business loans service launched in May 2012 promising to make funds available within 15 minutes of an application. Business loans of £3,000 to £10,000. Rates depend on a risk assessment of the applicant.

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