Addressing the UK SME funding gap
In this article, Toby Furnivall, CCO of Leasing and Lending, Triple Point, discusses how we can address the funding gap for UK SMEs.
Since the financial crisis of 2007-2008, SMEs have continued to feel 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. Mid-sized SMEs in particular fall into the ‘missing middle’, they are too big for microfinance initiatives but too small for commercial banks to consider.
Many of these growing and profitable SMEs require sophisticated financing between £500,000 and £5m to fund growth, stock or changes of ownership, such as MBOs, and are faced with very limited options. There are, however, a new breed of alternative finance providers emerging to support these businesses.
The areas that were once dominated by banks now attract a broad range of funders and investors, covering an array of approaches from asset-based finance to peer-to-peer lending, with direct lending and leasing also enjoying some of the strongest growth and popularity. All these strategies are increasingly critical in helping SMEs secure the financing they need to help drive economic recovery.
Non-bank lenders are playing an increasingly crucial role
According to a recent survey by the online marketplace Fivver, the pandemic is estimated to have cost UK SMEs on average £192,000 in the past 12 months. And, while restrictions may have ended, the 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 – the road ahead for many is still long.
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 provide 30% of all SME financing according to a recent report by UK Finance, illustrating the critical role they 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, which has placed significant pressures on them.
However, according to UK Finance, non-banks are doing everything they can to support customers through this crisis. They have rapidly adjusted their business models to manage demand for lending, have provided customers with payment deferrals, and have refinanced debt and negotiated additional lending from wholesale banks and the capital markets where possible.
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.
Triple Point has played a role in this growth. In total, Triple Point’s Leasing and Lending Team has provided over £250m of financing to UK-based organisations since the start of the pandemic.
Leasing and lending strategies are relieving funding pressures
Leasing and lending strategies can and should play a crucial role in relieving financial pressures across both the public and private sectors. They also provide prime opportunities for investors as, in this low-interest-rate environment, they can offer attractive yields uncorrelated to traditional asset classes.
Additionally, despite the crucial services SMEs provide to society, they do not typically have sophisticated ESG approaches. However, there are lenders actively working to support these groups and meet their needs for efficiency and liquidity.
The events of the past 18 months have affected every aspect of daily life, and SMEs have suffered the economic brunt of it all more than most. But there is now a growing recognition that the financial services sector, including the alternative funding arena, in areas such as lending and leasing, has the power to do more to protect SMEs and help them grow.