Markets & Pools

At a small business finance consultation event last week, I listened with interest as the panel and audience offered views ranging from forced lending, peer to business/crowd funding, and invoice exchanges, to a small business bond market.

Each measure (including some means of reducing bank hurdles to lend) will, in my opinion, have some degree of success. And each approach comes with its own set of challenges. Forced lending goes against the heavier regulatory framework in place today. Social lending, crowd funding or P2P based approaches may address a portion of the market, but I think, are likely to come under increased regulatory scrutiny. Furthermore, relative loan sizes and high lending margins will make this a nice segment of the overall market, albeit a potentially substantive one.

Invoice exchanges will be interesting to investors looking for specific customer invoices to finance and experience in the US has shown that some debtors are much easier to finance than others, leaving SMBs with an average portfolio of customers struggling to get the price they need. And to induce an SMB to take the leap to put its invoice up for auction requires education and promotion, both of which will come in time. Fraud risk can also be an issue in an auction, as unlike conventional factoring, the investor in an auction may not have the time to check every invoice prior to bidding. Having said all this, invoice marketplaces can certainly address a portion of the market and can be instrumental in widening participation from non-bank debt investors.

A bond exchange for small businesses could be interesting, but will still face many of the challenges that inhibit bank lending: regulation, information asymmetry, and liquidity. An initiative like this can only succeed with political will and the right regulatory framework and market incentives. Whether we start with bankers acceptances and guaranteed notes or move straight into simplified bond-type instruments, this could be a valuable node in SMB commercial finance distribution.

Balanced regulation, easily available credit information and critical mass of lenders/investors could allow a business bond market to offer SMBs closer to what the corporate bond markets can provide larger businesses. Hopefully, policy makers will listen carefully in their consultations and avoid overregulation or burdensome, resource-draining, compliance-focused rules. Creating a critical mass of lenders and investors will be straightforward in the right circumstance – they will be drawn to opportunity.

To me, the key factor affecting the delivery of commercial finance to SMBs is still information. Corporate credit information services and retail customer data are well established and lenders are able to able to quickly access credit histories for both ends of the spectrum.

The global credit and information agencies all have small business information products, however, the majority of private small business data tends to rest with individual banks (and the businesses themselves).

Hence, what little is available from credit agencies and publicly available statutory filings is generally insufficient to make loan decisions.

Question is, how do we create the pool of information needed by lenders / investors, be it for a SMB commercial paper market, or simple lender canvassing?