How non-bank lenders can finance the new-business boom
SMEs are the beating heart of the country, accounting for half of total turnover in the private sector. They are also a growing cohort. A study by UHY, the international accountancy network, shows that there were 726,000 new businesses created in the UK in 2020 compared to just over 636,000 in 2019.
Despite their importance to the nation, since the 2007-2008 financial crisis new businesses have felt the squeeze from the lack of financing from mainstream lenders. This has only been exacerbated by the pandemic as bank lending, other than facilities under the various Government-backed loan schemes, has continued to stall.
Many of these growing and newly established businesses are in requirement of sophisticated funding between £500,000 and £5m to fund growth, stock or changes of ownership, such as MBOs, and yet are faced with limited options. Nevertheless, alternative finance providers covering an array of approaches such as asset-based finance, peer-to-peer lending, or direct lending and leasing are increasingly stepping in to support businesses. All these strategies are increasingly critical in helping new businesses and SMEs secure the financing they need to help drive both their own and wider economic growth.
Non-bank finance providing the new business momentum
The past year and half have been turbulent to say the least. While restrictions may have ended, businesses are still trying to navigate a range of challenges. HGV driver shortages and border issues are having a significant impact at a time when businesses would have hoped to be able to focus on recovery.
On top of this, funding has been hard to come by since banks have been overstretched due to their support for existing borrowers and for putting a liquidity premium on rates, penalising those that needed funding. The result is that management teams have faced limited opportunities to access innovative, responsive, and tailored financing solutions for their needs.
With bank lending criteria remaining tight, non-bank lenders have stepped up their activities. The sector is now estimated to private 30% of all SME financing according to a recent report by UK Finance, illustrating the critical role non-bank lenders play. This is not to say that non-bank lenders have not faced their own challenges, too. For example, non-banks do not have access to Bank of England liquidity schemes, and many have not been in a position to participate in government lending schemes, placing significant pressures on them. Nevertheless, many have gone the extra step to support their clients, whether through rapidly adjusting their business models to manage demand for lending, providing customers with payment deferrals, refinanced debt and negotiated additional lending from wholesale banks and the capital markets where possible.
Leasing and lending stands out
Among the various funding approaches, direct lending and leasing have proved to be among the most successful. Direct lending, often via private debt or private credit funds, provides streamlined access to funding for SMEs and helps support them across a range of their financing needs, including acquisitions, shareholder realignments, MBOs, capex programmes, roll-out strategies and re-financings.
Businesses can access a range of loan types, depending on their needs. The first step is to approach a lender with information on the type of financing required. This direct borrower-lender dialogue helps to find a tailor-made solution for the individual needs of the business in question. As part of this dialogue, the potential loan size and terms will be set out.
Direct lending can take a number of forms, including an amortising loan which is repaid monthly, or a fixed term interest only loan, which is repaid after an agreed number of years. Another option is a revolving credit facility, allowing for even more flexibility in reacting to the ever-changing needs of a business. A further option for SMEs is the leasing of business-critical assets, such as machinery or vehicles. This can provide businesses with rapid access to vital infrastructure, ensuring that their operations can continue to run smoothly, even in times when cashflow is limited.
Relieving the financial pressures of establishing a new business
Leasing and lending strategies have a crucial role to play in relieving financial pressures across both the public and private sectors. Investors in products based on lending and leasing strategies stand to benefit as well – in the current low-interest-rate environment, they can offer investors attractive yields that are uncorrelated to traditional asset classes and unaffected by market volatility.
It is positive to see the rate of new businesses in the UK continuing to grow. However, with new businesses and SMEs bearing much of the economic brunt of the past 18 months there is now a growing recognition that the financial services sector can and should do more to protect new businesses and SMEs to help them grow. The UK is home to some of the most innovative and impressive businesses, and the non-bank lending sector has the power to do more to spur them on.
