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How do you solve a problem like scale-up lending?

Digital bank OakNorth is in the vanguard of new banks backing fast-growing businesses. We speak to its chief executive Rishi Khosla

Rishi Khosla, co-founder and CEO of OakNorth Bank

Rishi Khosla saw a problem and wanted to fix it. The fintech entrepreneur and his business partner Joel Perlman had already built one business from nothing to 3,000 staff before they exited. Then they turned their attention to the difficulties scale-ups face borrowing from banks and founded OakNorth, a digitally focused lender to fast-growing businesses, in 2015. They knew how hard it was to get a loan.

“We’d experienced the problem and said: we can build something to address this and help other entrepreneurs and scaling businesses,” says Khosla, whose first venture with Perlman, the financial data provider Copal Partners, was sold to ratings agency Moody’s in 2011.

Banks service big companies well enough – with fees to match. Equally, they can service micro-businesses; although the entrepreneur loses their home if it doesn’t work out. But when it comes to businesses with earnings of between £1m and £100m, there is the problem, Khosla says.

Banks use ratios to determine whether they will lend. “Those work when you’ve got a straight-line business that isn’t growing or acquiring,” explains Khosla. “But if a business is growing by 20 per cent a year, the difference between the last 12 months and the next can be 40 per cent.” A traditional bank would look backwards, not forwards, he says, considering not where the business is going but where it has been. “That’s pretty unsatisfying if you’re an entrepreneur trying to grow your business,” Khosla says.

OakNorth’s response has come in two forms. The first is machine learning. “Our technology focuses on getting that forward-looking view in a way that is efficient and gives an experience much closer to that of investment banking.”

Alongside that is a very traditional approach: meeting the customers. It’s up to a credit committee rather than just the computer saying no.

These methods seem to be paying off. Without heavy marketing, OakNorth has attracted clients such as plant-based snacks firm Deliciously Ella, property group Arora and Z Hotels. And in late March, the bank reported pre-tax profits for 2023 at £187m, up 23 per cent, and gross new lending facilities of £1.7bn, part of £10bn lent since it launched.

The big five banks have traditionally dominated lending to small and medium-sized enterprises. But for the second year, challenger and specialist banks accounted for a higher share of total gross lending, at 55%. That is the highest proportion on record, according to a British Business Bank survey of small business finance markets for 2022/23.

Furthermore, the report notes, gross lending by those challenger and specialist banks in 2022 was £35.5bn, the highest since the Bank of England started collecting records in 2012.

It’s a staggering change to the lending landscape. But Khosla, who says the OakNorth business model sets it apart from the challengers, still sees the big banks as significant players. “Do I think that they are losing segments? Of course,” he says. Khosla is bullish about OakNorth’s progress. “Our mission is incredible: to help entrepreneurs scale their businesses. We’ve helped create nearly 40,000 new jobs in the UK and something like 29,000 affordable homes. We feel like that speaks volumes for the impact we’re having.”

He and Perlman hold the biggest individual stakes in OakNorth, although the exact size hasn’t been disclosed. The last funding round, led by SoftBank’s Vision Fund, saw a $2.8bn valuation, but that was in February 2019. If OakNorth expands at pace in the US, it could need more cash.

OakNorth’s headquarters are in Soho, central London, rather than the Square Mile where banks are usually based. For another sign of difference, go to the bank’s annual report where all the directors wear OakNorth T-shirts. Natural enough for Gousto founder Timo Boldt, who sits on the board. A little more surprising for former financial regulator and new chairman Adair Turner.

Business Leader and OakNorth are partnering on an event bringing together medium-sized business owners, founders, CEOs and finance chiefs to discuss the challenges in scaling up and how to overcome them.

Over breakfast, you’ll hear from companies including Deliciously Ella, Total Fitness and Mowgli Street Food on their growth journeys and the lessons they’ve learned along the way. It takes place from 8.30am on Thursday, 6 June. If you’d like to find out more and put your name down to attend, head here.

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