Challenger bank OakNorth has just started lending to entrepreneurs and small businesses. CEO Rishi Khosla spoke to Business Advice about why current offerings still aren’t up to scratch and why he’s hoping OakNorth will have a big impact on the UK economy.
As access to finance becomes more widely discussed, so too does awareness of the latest raft of challenger banks aiming to widen options and fill gaps left by the established names. We’ve already seen the likes of Metro Bank, Aldermore and Hampshire Trust Bank start to make waves and after receiving its licence earlier this year, OakNorth Bank has begun lending to small businesses.
CEO and co-founder Rishi Khosla, has thrown down the gauntlet, calling for entrepreneurs to reject major banks which he feels have long prioritised larger companies and taken a “computer says no” approach to small business lending.
Khosla’s no stranger to the struggles of an early-stage business seeking finance, having previously founded his own firm, an outsource research business for investment banks. Copal Amba, which he founded with Joel Perlman, was then acquired by Moody’s Corporation in 2014. He said they initially funded themselves on a month by month basis, “there would be a cash flow crunch if payment was late, we were very much bootstrapping”.
Back in around 2005, at a stage when they needed £50,000 for cash flow, they struggled to get lending from the banks, and noted the opportunity looming. The idea for OakNorth took shape from there.
He added that even now, the UK had a way to go in catching up the US and Germany, with penetration of debt “pretty much double” that of the UK. “Our view was that there was a large gap hindering small businesses, where they’re not large enough to attract finance,” Khosla said.
OakNorth is therefore very much billing itself as a bank created by entrepreneurs for entrepreneurs. “We’re looking at a quicker turnaround and increasing the customer experience,” he told Business Advice. There’s a targeted focus in OakNorth’s approach – it’s very much steering away from trying to deliver all things to all people.
Barclays veteran Cyrus Ardalan, who joined the bank as chairman in the summer, said OakNorth would be more nimble than big banks, aiming to provide short-term working capital within days and larger loans within weeks.
He added that it would be better value than the P2P lenders offering alternative sources of loans to small firms and would provide cash flow finance as well as the more established small business products like asset finance.
Its term loans and short-term working capital loans don’t always have to be secured against customers’ property. Khosla’s view is that with falling home ownership and a rising number of young entrepreneurs operating in industries which don’t require property assets, the older property-backed lending model doesn’t work for significant numbers of high-growth UK firms.
“If the British economy is to grow, everyone knows we need small businesses to be thriving,” he said. “Entrepreneurs and business owners have been underserved by large lenders for decades, in what has become a defining problem for our economy.”
He dubbed this a “peculiarly British disease” resulting in chronic underinvestment in SMEs, yet the European Commission found they were still managing to generate around 50 per cent of the UK’s GDP.
Khosla feels that for newer businesses, “a lot of people have a great idea of a product or service or hospitality”, but for all young businesses “keeping a grasp on overall financials is tough, it just all adds up”. He said it can be all too easy to significantly overspend and cash flow finance could make a difference here.
He has spent a lot of time in both Silicon Valley and India, where Khosla said the entrepreneurial culture is palpable, with strong SME percentages. He wants to cultivate an ability to help the equivalent community in the UK “achieve goals, as that will help the UK economy achieve goals and I am passionate about that”.
It has been a gradual process getting OakNorth ready for action, and Khosla said as with any new business “there are some significant challenges, which are amplified in for a challenger bank”.
While it’s becoming an increasingly competitive space, the regulation process is still lengthy and there are established ways of doing things that means change can be slow to come about. It is after all, “creating an entrepreneurial startup business in an industry of risk aversion”, as Khosla put it, and you can’t start the business until you have undergone the full regulatory process which is “tricky as there’s such a high bar”.
Regulation ahead of starting business isn’t the only problem facing today’s batch of new banks. A host of challenger names recently appealed to the chancellor to rethink the new bank tax outlined in his earlier Budget. They claimed he needed to “level the playing field” and their ability to lend to small firms would be disproportionately affected by the unexpected eight per cent tax surcharge which will be levied on banks’ profits in the UK above £25m next year.
Representatives had previously met with senior Treasury official Charles Roxburgh, hoping for an immediate amendment such as raising the £25m threshold, but to no avail.
Paul Lynam, the chief executive of Secure Trust Bank, said: “If smaller banks are to be put on the same tax footing as larger banks, then how do we also get put on the same competitive footing in terms of capital and funding?”
It’s an ongoing back-and-forth as the challengers aim to negotiate a more agreeable outcome, but also reflects the difficulties in establishing a one-size-fits-all approach in a space where much disruption is happening.
From Khosla’s perspective, not only does he relish a challenge, but he enjoys learning from those who have gone before him. “My general view on business is that I’m hungry to learn, I like to read about success and failure,” he said. “Aldermore, Shawbrook, Metro, they all had different approaches that I admired.”
Meanwhile, the team he has been assembling has also drawn headlines – Ardalan was the former head of public policy and vice-chairman at Barclays’ investment bank, while the former chairman of the Financial Services Authority, Lord Turner of Ecchinswell and the former CEO of Alliance Trust Savings, Robert Burgess, also sit on the bank’s board. Khosla said his team “from the board all the way down is phenomenally motivated and focused”, and he is developing the business with a “strong belief” in the “cross-fertilisation of people”, as he feels that’s how more innovations come about.
The aim is to lend £1bn to small businesses over the next five years, funded by deposits from retail savers and then companies. Khosla is confident that his approach will make access to finance a less painful process for many new firms and with the appetite there, he could well achieve that goal if the customer experience is as streamlined as he hopes.
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