UK Challenger Bank Helps SMBs Build Credit History and Access Loans

Sixty-five percent.

That’s the proportion of new U.K. businesses that are refused credit, leading to an estimated 6-billion-pound lending gap between small and medium-sized enterprise (SME) credit demand and available credit.

That data, according to research by U.K. challenger bank Cashplus, shows the funding challenges entrepreneurs and small businesses face in the United Kingdom, which payments and banking veteran Rich Wagner knows all too well.

Several years after launching the regulated banking institution and securing 7.5 million pounds ($10 million) in a Series A, he was still declined a loan based on the simple fact that the company didn’t have any credit history.

“I had been a regulated institution [for 10 years], I held a consumer credit license, and I was providing financial services products and I still couldn’t get unsecured credit from high street banks,” Cashplus founder and CEO Wagner told PYMNTS in an interview.

That, in addition to the fact that getting a standard consumer current account was a six-month journey navigating a heavy-handed bureaucratic process, made it an all-too difficult process for individuals looking to start a business.

These hurdles prompted the launch of Cashplus Bank back in 2005 to support these entrepreneurs and small independent businesses often overlooked by high street banks, providing them with faster and simpler banking services, as well as helping those struggling to secure affordable lending.

And in 16 years, the company has achieved some major milestones, including processing 20 billion pounds in payments, and providing a total of 690 million in lending since inception. The U.K. challenger bank also serves more than 1.6 million customers in the country and has secured 7% market share of all new U.K. startups looking to set up a business banking account.

According to Wagner, the bank has continued to show its ability to create a profitable and sustainable business since it launched, abiding by the principle of operating a business that is “good for the customer, good for the business [and] good for the shareholder.”

Building Small Business Credit Score

Building on the legacy of the company’s personal Creditbuilder which has been used by over 200,000 consumers to improve their credit score, the FinTech recently launched a new Business Creditbuilder tool, developed in collaboration with credit reference agency Equifax.

With the tool, businesses will be able to build their credit score by simply signing up for a business current account and repaying a loan of about 100 pounds (about $136) provided by Cashplus over a 12-month period.

“What this does is genuinely show the user as someone who has the ability to understand taking credit, repaying credit and paying off credit,” said Wagner, adding that credit bureaus have come to accept the tool as a valid way to show other lenders that a customer can afford and manage credit until it’s finally paid off.

To further support businesses, the company has also unveiled a business credit card for U.K. sole traders and small businesses, offering a 1% cash back on all purchases with no monthly or annual fees as part of a goal to deliver 5 billion pounds ($6.8 billion) of new SMB lending over the next five years.

High Street Banks are Losing Out

According to Wagner, high street banks are missing a huge opportunity to serve SMEs based on the assumption that businesses are only in search of large amounts of money.

That couldn’t be further from the truth, he said, pointing out that entrepreneurs and sole traders that are in their early launch phase have simple needs like a laptop or a phone to run their business.

“Startup entrepreneurs would be very happy with 500 pounds and then once we know that they can pay that 500 pounds, we’re very happy to offer them 1,000 pounds, 2,000 pounds, 5,000 pounds,” he said, referring to their “low and grow” strategy of offering smaller loans until customers demonstrate their ability to repay a loan.

Another reason banks stay away from this group of SMBs, according to Wagner, is because per U.K. regulation lenders must treat sole traders and entrepreneurs as consumers, and lenders need a consumer lending license that treats and protects these clients as they would a consumer.

“That’s where we think that we do differentiate from the standard banking community because we have the technology [and] the experience of lending into this space, certainly better than any of the high street banks [or] most of the digital banks,” he noted.

A Free Product at Your Own Risk

Unlike other neobanks that gave their products away for free for years and ended up incurring huge losses, Wagner said he believes offering an “absolute free product” doesn’t make business sense considering the fees involved in processing transactions and providing credit cards to customers.

That’s why digital banks like Starling and Monzo are migrating to a subscription model, “similar to what we did and continue to do 16 years later because at some point the customer has to pay for their banking services,” he said.

Moving forward, the U.K. FinTech is planning to roll out a guaranteed savings product for their business credit card, offering to guarantee a lower rate than the issuer that potential customers are currently with.

As Wagner said, “I’m very excited [because it’s] something that I launched in the U.S. about 20 years ago and I look forward to bringing it to the U.K. in the next six months.”