By Farah Khalique
Let’s start with the facts: nearly 80 per cent of financing to the real economy in Europe is provided by the banks versus just 20 per cent in the US. European businesses are still heavily reliant on bank lending, while their US counterparts look to non-bank providers and capital markets.
Lobby group TheCityUK identified this problem in its EU report on alternative finance for SMEs and mid-market companies, published last year, which called for “real market change.” There is no doubt that companies in Europe are tapping debt capital markets more than ever but they are out of reach for the average SME. This is where non-bank providers step in.
The US has spawned a number of alternative providers, such as Atlanta-based Kabbage that lends to online sellers on marketplaces including eBay and Amazon. Such an ‘alternative’ idea would never have originated in Europe, says Max Chmysuk, founder of revenue-based finance provider Fleximize.
“There is a culture gap. The way the US appreciates entrepreneurship and people taking risks and doing something innovative is quite different from Europe,” he says.
Chmysuk thinks it boils down to the ways deals are analysed in Europe, which is a hot topic of discussion.
“In the US, someone with a good idea can raise tens of millions of dollars to develop that idea, but this would never happen in the UK. Here, a company is expected to be already established and generating revenue. I know that venture capital firms are talking about how to change that,” he says.
Given the widening funding gap as European banks curb lending to SMEs, it is time for the culture gap to shrink. The message seems to be getting through – last month PayPal announced the launch of PayPal Working Capital which will start lending to small businesses this autumn. The scheme will offer payPal’s business customers, including eBay sellers, cash advances against future sales. Admittedly, PayPal is an American company which already launched this service in the US almost a year ago, but it’s a start.
Farah Khalique is a freelance business and financial journalist, with a keen interest in writing about non-bank financing solutions that can help SMEs grow their business. She has written extensively about banking scandals and has made TV appearances on Sky News and The Wall Street Journal Live to comment on topical issues including money laundering and bankers’ bonuses. Follow her on Twitter.