The Financial Conduct Authority (FCA) took on responsibility for the regulation of consumer credit in 2014. In that time, it has introduced various measures to protect people, including rules governing payday lending and restrictions on how credit brokers charge fees.
However, no equivalent regulation applies to the commercial credit sector. External finance is often an essential for helping new businesses get off the ground and grow, but the path to obtaining it can prove troublesome.
Which Financial Industries are Unregulated?
“You might be looking for a swift financial boost to your business, or you might want to start a business as a lender in this area. Either way, there are certain financial industries which are unregulated, unlike consumer credit.”
For example, one business investing in another without any security is not something that is regulated by the FCA.
“This is a case of speculating on whether that business will do well or not, purely as the basis for investing in it. However, once you secure a loan, against a property or equipment say, then this becomes regulated.”
Other forms of unregulated finance for SMEs include:
- Invoice factoring
- Cryptocurrencies, such as Bitcoin
- Non-status lending
“In bridging and development finance, being a non-status lender means you make lending decisions based on things such as value and potential of a property, so long as it’s not a primary residence. The key thing is you don’t have to perform credit checks.”
Does More Choice Mean Better Choice?
“Sound credit management is the foundation for business success and growth, and survival. But this means making the right decision when it comes to obtaining finance.”
The unregulated business lending industry has meant considerably more choice for SMEs looking for a loan.
“While banks and the mainstream have provided most of the growth in new lending, now nearly 10% of the market is taken up by unregulated services for business customers.”
“When it comes to managing your money, including covering cash-flow, taking out a loan might be a necessary option. But how transparent is the process?”
In consumer lending, there must be consistent information on show about the cost of borrowing, fees and repayment terms.
“It’s a question of affordability, alongside transparency. The risk is that SMEs get into trouble with debt because they fail to gauge how affordable their loan will be, and the lender is not carrying out these checks.”
Costs and Benefits
“A dynamic business lending market is essential to stimulate growth and encourage fresh enterprises. It also makes sense that businesses should be able to turn to alternative financing sources with confidence.”
The downside is where this additional choice comes with unacceptable costs and consequences.
“The risks are twofold:
- To those SMEs who take out loans but find themselves in difficulties in meeting their payments
- To businesses that set themselves up as lenders then find they are constantly having to chase payment”
SMEs need access to responsible financing options. Those providing these options must do so with a sound grasp of customer care and credit control.
Business Aspects Magazine thanks Paul Daine for his contribution to this article.
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