Why Regulation Will Be The Driver of SME Lending

2017 has the potential to be a year of change. For most SMEs a new US president or triggering of article 50 will actually have little bearing on their plans.

There are a lot of commentators who look at the changes across the pond and the changes in the Eurozone and link these to be availability of funding and ease of access to finance for SMEs within the UK.

It is true that many commercial lenders who are active in the UK market will be influenced by these factors and other geopolitical events taking place in the wider world. It would therefore be easy to link these events to the availability of SME finance and for SMEs to look at these events as larger influencers with regard funding than they may actually be.

When it comes to the real factors that will drive access to funding in 2017 is less likely to be global events, rather it will be changes to the regulation of commercial finance and how these new regulatory guidelines are adopted by lenders.

Why The New Regulatory Environment Matters

It is always interesting to see how differently regulation is viewed between commercial borrowers and personal borrowers. Personal borrowers tend to see regulation as something which protects them against unruly lenders or unfair terms, whereas commercial borrowers often see regulation as a barrier or hurdle that they simply need overcome.

This is probably driven by commercial borrowers borrowing for a reason other than simply to acquire whatever it is the finance will enable them to obtain. The commercial borrowers funding is about achieving an end aim. Whether this is increased profits, cost savings, improved cash flow or another reason.

The other side to greater regulation of commercial borrowing is that for many this is the first time regulation is really going to impact upon them. Lenders will have some of their flexibility limited, borrowers will be categorised and put into boxes and not everyone will be happy with where they end up.

For anyone who thinks that regulation means a set of rules then they have misunderstood how regulation really works! Remember the most regulatory guidelines are written and implemented before they are tested in the real world. This means that rather than a series black-and-white rules, regulation actually generates various shades of grey with nobody actually knowing whether their interpretation of the rules is 100% correct or not.

The danger is that where lenders are not 100% certain the only safe option they have is to say ‘no’. This is where new regulation, designed to protect the borrower, starts to work against the borrower.

SMEs this is where the concern starts to kick in.

Borrowing In a New World

As always the devil is in the detail. The typical commercial borrower knows what they want, they know their industry, they know the opportunity and they know what level funding they need. For most SMEs their proposal is simple and easy to explain.

This is where, when a lender raises a strange query, that the SME looks on with some confusion, quite rightly failing to understand why the lender is asking what they are and why it should really matter at all.

It is at this point that a lender who is not 100% certain what new regulations mean and an SME who doesn’t realise things have changed sees the whole relationship breakdown. The SME walks away without the funding they wanted and with no real idea why they failed to secure borrowing.

Reacting To New Regulation

First things first. Trying to apply logic or common sense to the application of regulatory changes is a nonstarter. If regulation exists it exists, you can’t change it. Your choices are either to rally against if it doesn’t work in your favour and end up frustrated, or take advice to understand how things have changed, tailor your proposal and work with lenders that will do what you want, in a way you want, in a timescale that works for you.

The chances are that a lender will never explain how regulation changes what you want to do. After all, they are the ones who have to abide by the new rules. If lenders advise you too far regarding how to present your funding proposal then they will be seen as trying to work around regulation which is something the authorities look dimly upon.

The SME looking to borrow in 2017 then the best bet is to take advice, talk through what you want to do with a professional and make sure that when you apply the borrowing you are successful

There remain loads of opportunities out there for the SME regardless of what they want to do so no need to panic, but there is a need to properly structure proposal to ensure that the new regulatory environment works for you rather than against you.

By Dave Farmer

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