Alternative finance to prepare for growth as UK SMEs struggle to secure funding from traditional lenders

Following an uphill battle for businesses across all industries over the last 18 months, the UK is now poised for economic growth in the post-pandemic boom.

Representing 99.8% of Europe’s businesses and accounting for two-thirds of total employment, the SME market – often referred to as the backbone of the UK economy – will be fundamental to this growth. But with more three quarters (77%) of businesses unable to secure traditional bank financing, the need for alternative finance to fuel their expansion is greater than ever.

Yet research from law firm, Walker Morris, reveals that although 40% percent of SMEs have plans to grow over the next 12 months, almost half of these (45%) cite concerns about using alternative finance providers, despite being refused funding by traditional lenders.

The pandemic spurred record lending to SMEs in 2020, hitting £54 billion in the first nine months of the year as 1.5 million businesses drew on government-backed loans, but many businesses now require additional finance to enable them to invest in growth.

More than half (51%) of SMEs currently seeking funding will use it to grow through acquisition, with 46% looking to invest in real estate.

This new research demonstrates the scale of the opportunity for alternative lenders as economic recovery gets underway – the UK’s alternative lending market is now worth a record £6.26 billion, with the European market doubling last year to over €6.6bn – however, there is clearly more to be done to reassure SMEs that alternative finance is a viable option for them.

The top three barriers for SMEs seeking finance from an alternative lender are:

1. Concerns over changes in market dynamics and the potential impact on the customer (SME)
2. Unregulated lending / potential regulatory loopholes
3. Higher interest rates / perceived as not competitive against bank lenders

James Crellin, Director in the Finance Group at Walker Morris, said: “Alternative finance is arguably the key to helping the economy get back on its feet and grow following the challenges businesses, particularly SMEs, faced during Covid-19. However, it’s undeniable that there are many hurdles SMEs face when it comes to securing funding – and it’s clear that the perceived risks around insecure finance and of regulatory loopholes with alternative finance providers is a huge barrier. These concerns are of course based on SME’s impression of alternative lenders, and by no means the reality of alternative finance.”