Small businesses can’t bank on traditional lenders: how non-bank lenders can support your SMEs
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Over the last year, the global fallout from the war in Ukraine has rendered it increasingly expensive to run a small or medium-sized business. With energy prices and material costs soaring, SMEs face an ever-growing need for external funding if they are to thrive. As interest rates rise, however, and potential new Bank of England rules undermine the attraction of SME lending for banks, this much-needed capital is in danger of slipping further from the reach of smaller businesses.
With operational costs high and banks’ lending appetite in decline, SMEs are increasingly considering alternative sources of funding. This is where non-bank lenders can play a strong role. Not only do such non-bank lenders offer an alternative to traditional sources of funding, but they provide tailored, secure loans particularly suited to smaller businesses.
Rising interest rates are a strain
At a time of such uncertainty, transparent and reliable capital is vital for SMEs to grow and develop. Yet, after the most recent rate rise by the Bank of England saw interest rates reach 4.25%, the long-term financial pressures attached to securing finance are growing ever greater for SMEs.
Indeed, companies are facing surging interest rates on lending - the average rate on new bank loans written has increased fivefold from just 0.98% in May 2020 to 5.84% in December 2022, according to UHY Hacker Young, the national accountancy group. Although the majority of analysts appear to believe that mid-summer will be the high point of the rise in rates, there is no guarantee that the upward trend will stabilise.
While having access to external funding is a crucial catalyst for the growth of smaller businesses, the rising cost of securing such funding has meant that fewer than ever firms are applying for loans. In the last three months of 2022, the number of SMEs using external finance was down 44% from the same period in 2021.
Set against this backdrop, non-bank lenders can play a key role, providing fixed-rate loans tailored to the needs of individual SMEs – affording some financial security to smaller businesses while we go through this tense economic period, helping them to continue their growth even in a relatively high interest rate environment.
SMEs can’t bank on traditional lenders
Last year, research revealed that nearly a third of SMEs felt that ongoing challenges in securing lending had led to an investment gap in the UK when compared with European competitors. Now, new capital rules planned by the Bank of England mean the possibility of securing funding is becoming ever slimmer as they will make it more expensive for banks to lend to SMEs.
Indeed, one estimate by consultancy firm Oxera predicts that the new rules could reduce small business lending from banks by up to £44 billion. To put this in perspective, in 2022, UK banks had £197 billion in outstanding loans and overdrafts to SMEs. With interest rates rising and traditional sources of funding becoming sparser, it is perhaps no wonder that SMEs are increasingly looking to non-bank lenders to provide the secure lending they need.
Advantages of non-bank lending
Many of those SMEs searching for funding are recently formed, with over half a million small business being created annually in recent years. These growing and newly established businesses are in requirement of sophisticated funding between £500,000 and £5 million to fund growth, stock, or changes of ownership, such as MBOs, and yet are faced with limited traditional options.
Key to the nature of non-bank lenders is their capacity to deliver bespoke lending to individual companies. With their specialised products and expertise in supporting SMEs, private lenders are well-placed to offer tailored deals, which best support businesses’ growth plans. Co-operation is central to the relationship between borrowers and non-bank lenders, and the personalised approach of these lenders helps to engender trust between both parties.
Non-bank lenders also attract new funders into the market. They do not have the same access to capital as traditional banks, so they need to make sure that they have a diversity of funding sources as part of their business model. At any time, they could include pension funds, endowments, and large asset managers. This greater array of funders gives SMEs more choice when they are assessing their funding options from non-bank lenders.
Loan decisions are also quicker. Often non-bank lenders have systems that make the application process much faster than with traditional banks. Credit decisions are returned in a matter of hours or a few days. So, SMEs under financial pressure can typically rely on getting a response as soon as they need.
SMEs are the lifeblood of the UK economy. They provide much of the dynamism and energy that powers the innovation driving business forward. Funding their strategies and growth plans are critical - which is why having a thriving non-bank sector is equally vital.
