Labour Is Still Pushing Financial Capitalism

When Gordon Brown (remember him?) repeatedly proclaimed the "end of boom and bust" he was declaring his belief - along with that of his fellow group-thinkers - that capitalism had found a way to become sustainable. But his support for unbridled growth in everything from investment banking to the Private Finance Initiative eventually revealed he was hooked on financial capitalism, rather than the 'real' capitalism of employment and productivity. Look at how ISAs, for example, have become a drain on the 'real economy'.

Ed Milliband has been trying to repair Labour's image with some lipstick apologies here and there, but old habits die hard.

Recently, the party released "An Enterprising Nation", a report by its Small Business Taskforce. To be fair, there are some good insights into the problems faced by small business, as you would expect from the membership of the taskforce. But, surprisingly, the report contains no proposals for short term solutions, or even medium term solutions. One suspects that either the collective intelligence had already fed all those ideas into the government, or the left wing political establishment doesn't grasp the need to foster an environment in which new businesses can start and thrive today.

Academic as they may be, perhaps the worst of Labour's long term ideas is that of a US-style Small Business Administration. It's an idea I first heard from them in November 2011. And as I pointed out then, the SBA programme had already gained a somewhat unhealthy reputation through David Einhorn's book "Fooling Some of the People All of the Time." Heavy application of the Labour lipstick has now branded this idea the "Spark Umbrella" (a nod to the many local German savings banks, or sparkassen, to which this programme actually bears no resemblance).

Basically, the idea is to saddle the UK with 20 lending vehicles, or "Sparks", funded with £10m of public money (naturally) and £90m drawn, no doubt, from the traditional City suspects. Each Spark would fund its lending to local businesses by selling the loans to the "Spark Umbrella" which would in turn finance the loan purchases by issuing bonds to investors eager to package those bonds into  another set of bonds to sell to... anyone stupid game enough to buy them.

Sound familiar? 

The only way not to end up carrying the can for this, would be to emigrate.

But the UK already has an artificial, publicly subsidised channel for small business lending that limits innovation and competition in the retail financial markets. It's run by the UK's major banks. So we don't need another publicly guaranteed channel to crowd-out sustainable private alternatives. 

I mean, who would start a local lending business knowing that the government was about to launch a publicly funded competitor?

The government should foster an environment in which the private sector can generate alternative finance options, not simply create markets that are ultimately underwritten by the taxpayer.

The fundamental flaw in the Spark Umbrella is its reliance on securitisation (or vertical credit intermediation) to try to overcome the riskier nature of small business lending. That model is hugely expensive in terms of issuing and underwriting bonds that are prone to being mis-priced, particularly in riskier markets, as we have seen. It also creates huge scope for moral hazhard, and traditional financial institutions, intermediaries and speculators are likely to be the only potential winners - as Einhorn's book reveals. There is certainly no guarantee that the loans to small businesses will be competitive with other potential alternatives.

Anyone pointing to the US for solutions also has to understand that, like Germany, it enjoys a much more varied set of small business funding options than the UK, as Breedon reported. So it's possible that the SBA won't have crowded-out US private finance businesses in the way that Spark Umbrella would in our bank-dominated market. 

It's also worth noting that Spark Umbrella is purely debt focused, whereas only 3% of UK small businesses finance themselves by issuing shares.  

Of course, we already have a rapidly growing set of alternative financial services platforms that are beginning to solve the problems that the Spark Umbrella will not. Peer-to-peer lending and crowd-investing provide finance to borrowers and entrepreneurs in small amounts directly from many people at competitive rates from the outset, using both debt and equity finance. There is no need to create new markets for these platforms to grow. However, the government has been dragging its heels on the removal of regulatory barriers and perverse incentives, and that does represent an opportunity for opposition parties. 

True, the government has directed some of the Business Finance Partnership funds through peer-to-peer finance platforms. But that funding goes directly into the businesses who borrow - not through countless intermediaries in the financial markets. Labour needs to recognise the difference.

Horizontal vs vertical credit intermediation from Simon Deane-Johns

'Bank' of Dave Goes P2P

I've hugely enjoyed the documentary series tracing Dave Fishwick's valiant efforts to start a small community 'bank' in Burnley high street. 

I say 'bank' because, while it made for good television to say so, Dave didn't necessarily mean "bank" in regulatory terms. His goal was to enable local people to lend to other local people and businesses without profiting unduly. He rightly thought that's what banks are supposed to do, so he was determined to call himself a 'bank' to make the point. And his good-humoured, optimistic crusade has certainly rammed the point home.

While Dave also didn't necessarily set out to launch a peer-to-peer lending marketplace, his path to launch was eerily familiar to those who have done so. The FSA wouldn't speak to us either, prior to the launch of Zopa in March 2005, but was all too keen to discuss the detail afterwards. Fortunately we'd done our homework and didn't have to stop taking money. At least that made for good TV in Dave's case.

Since 2005 a dozen other management teams have also threaded their way through the regulatory maze to directly link savers and borrowers, or investors and entrepreneurs, via online 'P2P' lending or crowd-investing markeplaces. And it's good to see that Dave's journey has led him to adopt the peer-to-peer model on the high street. He may be facing the bricks-and-mortar problems that the online models solve, but at least he's shown there is very real demand for innovation amongst people who still manage their finances by walking around. And the benefits to the 200 local borrowers who are paying a net 5% to local savers are undeniable.

Unfortunately, there are still unnecessary difficulties in structuring these businesses, regardless of whether they facilitate loans or investments in shares or debt. The sources of that uncertainty were summarised here in January 2012, here in February 2012, here in June 2012 and here in July 2012. Industry CEOs and others met policy and regulatory officials to discuss these difficulties at a summit in December 2012, and again last month (as summarised here). The salient points were also explained again in my submission to the Parliamentary Commission on Banking Standards.

However, while it's clear there is plenty of shared frustration and many officials have been supportive in discussions, there is worryingly little sign of actual regulatory change.

We need a lot more war stories like Dave's.

My Legal Alter Ego Has Been At It Again

Image from Parliament.uk

This time he's made a submission 

To the Banking Standards Commission.

He's a poet and he didn't know it.

Google, Amazon and The Shape of SME Finance

In November 2007 it seemed clear that facilitators like Google and Amazon would capitalise on their alignment with their customers' day-to-day activities to disrupt banking. Both of these giants already have e-money licences in Europe (I helped Amazon apply for its own), and the latest foray is into trade finance. Google will offer a line of credit for AdWords advertising spend, while it appears Amazon will lend to selected small businesses against their projected sales over the Christmas season. 

While these services may be offered initially in the US, where there are lots of small business funding options, bear in mind that only four UK banks control 90% of the small business finance market and are lending less and less to them. And while some UK banks enable some merchants to obtain cash advances against their card receivables, it's not exactly a core activity.

The competition alone must prove welcome, yet the critical feature of both the Google and Amazon services is that they are seamlessly intertwined with customer behaviour. Both businesses could have decided to launch free-standing, me-too banking services (like the UK supermarkets), but they have not done so. No doubt they also intend to attract new customers with the latest services, but only by showing that they support what small businesses want to do - namely, sell their own goods and services across a staggering array of markets and demographies.

And by patiently facilitating their customer's activities, neither Google nor Amazon needs to incentivise staff to sell services to people who don't need them, as banks have done.

Government Support For P2P

The authorities tend to view people sharing content as 'piracy', but fortunately when it comes to money the UK government thinks sharing is a great idea.

I've covered the Breedon Taskforce report, and the Government's response over on The Fine Print. But the most significant points for ordinary people with surplus cash and those who need it are:

• the government's support for self-regulation of peer-to-peer finance; and

• the ISA scheme remains closed to new assets, despite recommendations that it be extended.

Don't Just Move Your Money: Spread It, Recycle It.

Great to see the MoveYourMoney campaign up and running - certainly a step up from the calls for futile mass withdrawals in 2010. But there are two significant gaps in the message.

Firstly: why should we move our money?

We don't need to 'save'. That's not really an activitiy in itself. And it's only one side of a much bigger story. Where do our deposits go?

As a society, our financial challenge is to get surplus cash from those who have it to creditworthy people and businesses who need it. Quickly and cheaply. At the rate that's right for both parties.

Our financial institutions don't enable this right now. They pay very little to interest to savers. They keep too much of the interest that borrowers pay. They use this 'margin' to cover losses from their own poor investments. 

So we've had to invent direct finance services that cut the cost of connecting savers and borrowers - meaning higher returns on savings and cheaper borrowing costs. As each borrower repays, you can re-lend your money to others. Think of it as financial recycling. The banks still play a role - the operators of these new services recycle the money through segregated business bank accounts - but they don't get to use your money the same way as if you opened your own personal savings account.

But this brings us to the second gap in the MoveYourMoney campaign. We shouldn't move our money to just one place. We need to put our eggs in lots of baskets -  we need to diversify more. There are many other baskets for your eggs than those listed.

Yet we are incentivised by government not to diversify. Most of us only get basic tax breaks (e.g. ISAs) for putting our small amounts of savings in the bank or building society (or in regulated stocks and shares).  This not only discourages us from using more efficient services, but also protects banks and building societies (and managed investment funds) from competition. Worse, it encourages us to put all our eggs in a few baskets, so our holdings of surplus funds are not diversified. We're told this is 'safe' to do because at least some of our money is protected by the Financial Services Compensation Scheme. But such insurance does not ultimately make these baskets 'safe' for all of us as a society. It makes these baskets expensive - because as consumers we all pay for the compensation scheme in the end. And we pay again as taxpayers when the highly concentrated risks in the financial system bring it grinding to a halt.

MoveYourMoney may not yet explain the need to get your money quickly and cheaply to creditworthy people and businesses who need funding. Nor adequately explain the need to diversify. But the government is now aware that the regulations and incentives are wrong. And organisations like MoveYourMoney should be helping us to keep the pressure on government so that these problems are actually addressed.

Submission on New Model for Retail Finance

Over on The Fine Print, I've set out both the initial summary and my full submission to the Red Tape Challenge and the BIS Taskforce on Non-bank Finance. I'm very grateful to the colleagues who contributed, as mentioned in the longer document.

Some might say that the alternative finance market is small beer at this point, and it's not worth accommodating them in the regulatory framework. But it's unrealistic to expect alternative business models to thrive amidst the dominance of the banks and while the entire financial system is hard-wired to suit them and other traditional investment vehicles (see the series of articles by Vince Heaney, David Potter and Adriana Nilsson in February's Financial World).

Others might also say that we should wait until the 'winning' business models emerge before figuring out what regulation may need to change. Yet picking winning business ideas is impossible, as Peter Urwin explains in "Self-employment, Small Firms and Enterprise". He has found that, while "entrepreneurship is crucial for economic growth... we have no idea where it will come from - not even in the most general terms."

As a result, the best that we - and government - can do is to ensure "a climate in which enterpreneurship can thrive".

Red Tape in Retail Financial Services

I'm off to Number 10 today, to talk about red tape that's constraining disruptive business models in financial services. In the interests of transparency, I've summarised my thoughts for both the legal community here, as well as below. I'll be submitting a more detailed paper in the coming weeks, both to the Red Tape Challenge and the BIS Taskforce on alternative business finance. I'm interested in any comments you may have.

In its invitation to submit evidence of ‘red tape’ that is inhibiting the developmentof ‘disruptive business models’, the Cabinet Office notes the example of Zopa, “a company that provides a platform for members of the public to lend to each other, who found that financial regulations simply didn’t know how to deal with a business that didn’t conform to an outdated idea of what a lender is…” 

Financial regulation similarly fails to deal with a range of non-bank finance platforms that share some of the key characteristics of Zopa’s person-to-person lending platform. Accordingly, financial regulation is failing to enable the cost efficient flow of surplus funds from ordinary people savers and investors to creditworthy people and businesses who need finance. In particular, the current framework: 

1. generates confusion amongst ordinary people as to the basis on which they may lawfully participate on alternative finance platforms (even though some are licensed by the Office of Fair Trading); 
2. does not make alternative finance products eligible for the usual mechanisms through which ordinary people save and invest, exposing lenders to higher ‘effective tax rates’; 
3. discourages ordinary savers and investors from adequately diversifying their investments; 
4. incentivises ordinary savers and investors to concentrate their money in bank cash deposits, and regulated stocks and shares; 
5. inhibits ordinary savers’ and investors’ from accessing fixed income returns that exceed long term savings rates; 
6. inhibits the development of peer-to-peer funding of other fixed term finance (e.g.mortgages and project/asset finance, and even short term funding of invoices); and
7. protects ‘traditional’ regulated financial services providers from competition. 

These regulatory failings could be resolved by creating a new regulated activity of operating a direct finance platform, for which the best-equipped regulatory authority would be the Financial Services Authority (as replaced by the Financial Conduct Authority). Regulation of the platform would be independent of any regulation that may apply to the type of product offered to participants on the platform (e.g. loans, trade invoices, debentures to finance renewable energy and lending for social projects). Proportionate regulation that obliges platform operators to address operational risks common to all products would also enable economies of scale and sharing of consistent best practice, and leave product providers and other competent regulators to focus solely on product-specific issues (e.g. consumer credit, charitable purposes). 

Similarly, there is no reason why products distributed via these platforms should not also be eligible for the usual mechanisms through which ordinary people save and invest, such as ISAs, pensions and enterprise investment schemes.

Banks Winning War On SMEs

The latest Bank of England "Trends in Lending" report reveals that a further contraction in funding available to SMEs, combined with unjustified hikes in the cost of finance, are causing small firms to conserve cash on deposit for 2012 - which in turn means free money for banks (my emphasis added):

"The major UK lenders stated that credit availability to SMEs remained unchanged or had eased. Most major UK lenders reported that their expectations for SME credit conditions during 2012 were less optimistic than their expectations six months ago. Under this outlook, which they attributed to current economic uncertainties, SMEs were expected to continue to have a reduced risk appetite and to be cutting back on investment and non-essential spending.

Concerns about credit availability have been reported, however, by business contacts of the Bank’s network of Agents. Contacts of the Agents reported that credit conditions continued to be tighter for SMEs compared to larger corporates. Small businesses and new business start-ups still found it difficult to gain access to credit. The Bank’s Agents also reported that some small firms were holding sizable cash balances because of concerns about the continuing availability of overdraft facilities. They reported that some small firms were reluctant to approach banks out of concern for an increase in the cost of existing borrowings, or reductions in overdraft limits, and sometimes had resorted to the use of personal loans instead."

Meanwhile, loan pricing by banks "continued to drift upwards", notwithstanding that:

"Default rates and losses given default were reported to have fallen for both small and medium-sized firms over the past six months, although some pickup in these quantities was expected in 2011 Q4 for medium-sized firms. Most major UK lenders, however, reported little evidence so far of deterioration in their existing SME credit portfolios."

A Good Year For Innovation In SME Finance

Source: Bank of England

As the headwind for UK banks stiffened today, we have news from MarketInvoice, the UK-based online invoice discounting platform, that it has enabled SMEs to raise £2 million against their invoices since February 2011, with £500,000 raised through the platform in August alone.

"Buyers" of each firm's invoices are institutional investors (such as asset managers and private investment funds) - who we know have plenty of cash in search of a home. They bid against each other on the platform to ensure some competition to provide cheaper funding. The types of deals done to date, and how the process works, are described here. In effect, this puts the traditional invoice discounting, or 'factoring', process online.

Of course, MarketInvoice is not alone in providing small businesses with alternatives to bank finance. Funding Circle, the peer-to-peer platform for small business lending, has also reported healthy interest. And Crowdcube facilitates equity investments.

So far, each of these new entrants has chosen to innovate around a specific funding instrument or process. No doubt other alternative providers, and further innovation, will emerge while the banks remain in complete disarray. Necessity, as they say, is the mother of invention.

Of "Credit Easing" and P2P Finance

Source: Bank of England

The governments proposal to intervene directly in the corporate and small business funding markets shows how grave it is that lending to UK businesses is shrinking.

But it seems crazy for the taxpayer to prop up zombie banks - subsidising tax-free savings rates that allow banks an average margin of 11% - and then to use more public money to shunt aside nascent private competitors. Surely, the result will be a never-ending spiral of financial dependency on the public purse. 

As NESTA recently reported, there are more innovative ways to finance small business. But the current regulatory framework - ironically designed to protect us from the banks - makes it unduly painful in terms of time and money to start true competitors. Which is why the P2P Finance Association was formed to help inform the move to a new regulatory framework and pave the way for new entrants. Without any of the vast subsidies the banks receive, these new platforms will lend more than £100 million this year to individuals and small businesses - and they already account for over 2% of the UK personal loan market.

So why doesn't the government foster the growth and development of alternative means of finance, rather than use public money to put them at risk?

For instance, why not extend the ISA tax-free cash subsidy to lending via peer-to-peer platforms?

A Plan for Small Business Growth?

Hat-tip to @JamesGreenThing for the link to the last Business Insider list of up-and-coming entrepreneurs.

These lists are always much more interesting 6 months on. In this case, the bubble in online coupons is more obvious, as is the fact that the fashion market is getting the Web 2.0 treatment. Yet BankSimple still hasn't launched.

Online invoice discounting has been on my radar since early 2008. So it's heartening that The Receivables Exchange is highly rated in the US, and reassuring that MarketInvoice is gaining traction in the UK. Doubtless there'll be more on that front soon.

Partly for that reason, SecondMarket really caught my eye. It's a market for alternative investments, so incorporates a channel for equity in private companies (e.g. CrowdCube in the UK). But the emphasis on gathering "robust market data" signals a growth in the availability of richer information about private companies. Focus on this is timely, given the massive official paywall around corporate data. Recent commitments to 'Open Government' (follow the Open Knowledge Foundation) are promising. There's already a Government commitment to arm consumers with their own data. Perhaps enabling SMEs to use their own data for their own benefit could be added to The Plan for Growth?

Image from AppAssure.

Anyone For 8% Market Share?

Barclays' withdrawal from the asset-based small business lending market is a real shot in the arm for peer-to-peer finance.

The head of the Barclays Business unit is quoted as saying, “It’s the leasing and hire purchase side [where] we found our proposition was not that compelling, comprehensive and competitive. Our market share was small, about 8pc.”

Those are my gob-smacked italics.

According to the same article, the Finance and Leasing Association "said asset finance represents the majority of debt-financed business, and that its members provided £1.7bn of funding to support business investment in December, 5pc higher than the same month in 2009."

Barclays says it can target this £21bn market segment with unsecured loans. But of course it's talking through its hat. The Basel III head-wind blows strongest in the unsecured lending space. So even if Barclays can magic the £1.7bn asset-based portfolio into unsecured loans, it doesn't seem a great alternative use of capital.

But it's an interesting strategy if you're lending some of your own cash on a peer-to-peer platform, instead of leaving it in a savings account.

Barclays stands to lose out on both fronts.

Image from Gogherty.com.

Swiss Tailwind For Personal & Small Business Social Finance

Banks will find it more costly and less profitable to offer short term unsecured personal and small business finance under Basel III rules, according to a recent McKinsey report.

To comply with the new rules, Banks face a long review of their businesses and products to reduce risk, use capital more efficiently and minimise the need for market funding by the end of 2012.

Which is more great news for participants in the 'capital light' social finance business models, like Zopa and Funding Circle in the UK.

As I mentioned in the context of the proposals to regulate vertical shadow banking functions, people using these 'horizontal intermediaries' benefit from:

1. Loan amounts being split into small one-to-one loans at inception, rather than having to wait for the slicing, re-packaging and grading involved in asset-backed securitisation;
2. A direct, one-to-one legal relationship between borrower and lender for the life of the loan, enabling better control over debt adjustment and collection, where that becomes necesary;
3. Lenders retaining day-to-day control of the management of their money and credit risk, minimising the capital required by the intemediary;
4. The intermediary not needing to slice and re-package debt to alter loan maturities, since lenders can manage this by assigning loans of unwanted duration to other lenders;
5. The intermediary having no balance sheet risk, and therefore no temptation to engage in expensive and complex regulatory, tax or other arbitrage;
6. Transparency in the original underwriting decision and loan performance against grade - making lenders' due diligence easy, and removing the moral hazard of the kind we see in vertical intermediation models, where the endless slicing and re-packaging makes due diligence hard.

For these reasons, one might expect banks to allow their depositors to lend directly to their personal loan and small business customers. But it seems unlikely the banks could feed themselves on the scale of fees their nimble competitors can afford to charge. And they would soon face calls to allow the peer-to-peer approach for mortgages and larger corporate loans - by which time other nimble providers may well beat them to those segments too...

Image from Gogherty.com.

Late Payments Directive And SME Trade Finance

The Late Payments Directive should produce a rush to implement reasonable supply chain finance arrangements for any private or public sector customers who want to try to insist that payment terms exceeding 60 calendar days are not "grossly unfair to the creditor".

That's all very well if the financing package is big enough to interest the usual suspects, but alternative models are needed to finance the early repayment of invoices on a smaller scale, and this bodes well for online social finance platforms.

Cheap Working Capital For Small Business

Over at Oikonomics, we are discussing how to balance the relative importance of what happens inside the bubble of the City with what happens in the 'real' economy.

From a regulatory standpoint, the credit crunch should have taught us to acknowledge the links between the wholesale and retail markets and regulate them both as part of a whole.

Excessive investment banking fees and bonuses are a direct result of a regime that reserves the job of matching investment funds and opportunities to a privileged few. "Democratising" the financial markets, or opening them up to public participation via simple, transparent products and 'thin' intermediaries who charge proportionate fees could break this stranglehold and result in a more inclusive, reliable financial system.

Artificially separating consumer and small business credit from the FSA's narrow remit has also allowed giant banking groups to 'shade' their unduly high margin downstream distribution activities from regulator sunlight, even though they feed the wholesale markets for CDO's etc. Left to fend for itself as 'independent', the OFT has not had the clout to constrain the likes of high bank charges and  card interchange fees (it's failure to clean up mortgage lending became so embarrassing it lead to the creation of the FSA's 'high street firms' division). Even now, lending to the 4.3m small businesses in the UK is pretty much unregulated and banks are getting away with all the old tricks in that market. Yet improving SME access to affordable working capital must be a top priority if we are to grow our way out recession.

So these things should all receive the same regulatory sunlight as the mis-selling of endowments, mortgages and payment protection insurance. Limiting bank margins to appropriate levels in the 'forgotten' markets would encourage competition from simple low cost products distributed by 'thin' intermediaries. Again, this would result in a more inclusive financial system and cheaper working capital for small business.

Zerozone? Short Banks, Long Riot Shields

After last month's gory detail on the UK's financial vulnerability, another barrage of charts from Zero Hedge illustrates why the fasten seat belt sign remains switched on.

The charts show the vast quantity of government debt issued by Portugal, Ireland (and/or Italy), Greece and Spain (now called the "GIPS", to be politically correct) due to be repaid ("mature") simultaneously.

"So what?" you may ask, if you've been distracted by the UK elections.

The charts also reveal high unemployment, budget deficits and public borrowing. So these countries will struggle to pay investors to extend the due dates ("maturities") on existing loans - “amend and extend” in callous market jargon. Investors will cut their losses and/or refuse to lend at less than credit card rates. Bail-out bodies, like the International Monetary Fund (IMF) will only help if the country concerned can implement 'austerity measures' to cut its deficit and get its economy under control.

The results of suddenly imposing such measures on citizens who hadn't realised how bad things were - or why - can be seen on Greek streets:

Not great for tourism, one of Greece's only growth areas.

In fact, Zero Hedge is tipping "the inevitable disintegration of the eurozone and the upcoming eventual debt payment moratorium." Which means there's a lot more mayhem to come for the European financial system. And even the EuroZerozone" countries with the deepest pockets - like Germany and France - could need to rein-in substantially.

So, if the UK is to reverse its trade deficit, it must find new export markets pretty fast. Here's how Economics Weekly thought 2010 would play out on the export front as at 1 March (i.e. before the Greek bail-out):

Given the speed of deterioration in the Greek scenario during April, the demand from EU countries may well be over-stated. And the debt maturity charts suggest 2011 could be worse.

A good time to go long Chinese riot shields?

SME's Shun Bank Finance Offerings

Interesting report today that "less than half SMEs have taken action [to address cashflow pressures] with 11pc hiring an in-house credit controller, 9pc using invoice discounting and 8pc factoring". There are over 4.7 million SMEs in the UK (see demographics below).

According to the Telegraph:

"Peter Ibbetson, chairman of NatWest and RBS small business operations, is concerned that so few SMEs are using banking services to alleviate the problem but small business organisations believe companies are reluctant to incur extra charges after their bank borrowing experiences."

In other words, it appears SMEs would rather leave debt on their books, taking any loss and resulting income tax deduction, than become hog-tied by a bank at rates of about 36%APR in consumer finance terms - at least that's the rate we estimated Zopa lenders would have to beat to offer attractive trade finance. That's because you should factor in (excuse the pun) the charges on any additional accounts you're required to hold as part of the finance deal, the holding cost of any deposit held as a guarantee, as well as fees and the interest rate on any overdraft, loans, letters of credit and/or factoring. SME owners are also increasingly required to take a commercial credit card, which doesn't benefit from protection from all the old dirty tricks that are gradually being weeded out under consumer banking and finance regulation.

Yet more evidence the time is ripe for an alternative source of SME trade finance?

The most recent UK government statistics (published Oct '09) show that, at the start of 2008, there were 4.8 million UK private sector enterprises of which 99.3 per cent had 0 to 49 employees. Only 27,000 (0.6 per cent) had 50 to 249 employees and 6,000 (0.1 per cent) employed 250 people or more.

Further Boost To Non-bank SME Finance

Last week, The Receivables Exchange secured $17 million in funding from Bain Capital Ventures.

I've been watching these guys since I learned of their launch in a response to my post about Zopa's trade finance efforts in November 2008. The coincidence was striking then, but even more so when they announced their integration with Ariba Network, the spend management services provider, in December '09.

Here's the video on how the Receivables Exchange works.

The key feature about this form of trade finance is that credit risk can be tied firmly to the buyer, rather than the supplier listing the invoice for 'sale'. There are various ways to understand and mitigate that risk, depending on the size of the buyer and whether it's listed/rated. I'll spare you the detail. Interestingly, the UK Treasury has just launched a consultation on how the government might support non-bank business finance, focusing on corporate credit assessment and transparency.

Of course, the primary challenge is one of marketing this model to enough time-starved small business owners to build 'critical mass' (an expresson I have come to fear and loathe) - hence the $17 million.

Definitely a space to watch.

E-invoicing Integrated With SME Finance Platform

Alternative trade finance for small businesses is beginning to snowball - at least in the US. Early this month, the Receivables Exchange announced its integration with the Ariba Network, a leading provider of spend management services.

The press release says the integration will enable SMEs "to seamlessly transfer their invoices from the Ariba Network to the Exchange’s proprietary trading platform for auction. Leveraging a cash optimizer tool embedded in the latest release of the Ariba Network, suppliers can calculate their cash needs as compared to their eligible outstanding invoices and select the invoices they want to sell to help them optimize their working capital management and improve their cash flow."

This is virtually the same model Zopa and various collaborators took to potential UK clients and partners in 2008. Marketing was the only (major!) hurdle, and we were in talks with someone very big and friendly to support it. But, as is often the way with these types of services, there were simply too many interim integration steps competing against higher core priorities for the service to go into development.

Full credit to the Receivables Exchange for getting this launched - although I still think they need a bigger brand name that is already well-known to all SME's if they are going to get real traction against the established sources of trade finance. I wish them luck.

Maybe it's a signal that Zopa and its partners should dust off their plans...