To find out what the future holds for the funding sector – and what trends business leaders should be aware of – Business Leader brought together a panel of experts in the sector.
- Andrea Reynolds – Founder & CEO, Swoop Funding
- Ben Barbanel – Head of Debt Finance, OakNorth
- Veronika Lovett – Co-Founder and Chief Commercial Officer, Esme Loans
- Roxana Mohammadian-Molina – Chief Strategy Officer – Blend Network
- Maggie Rodriguez-Piza – Chief Executive – Funding London
WHAT ARE THE MOST RELEVANT TRENDS YOU ARE SEEING IN THE FUNDING SECTOR?
Andrea Reynolds: “The start of the pandemic was all about CBILS and the bounce back loans and not much crossed our desks over and above these. What we are seeing now though is that some of the businesses who received this government support are now coming back into the market.
“This is because of the new rule which says that repayment of the loan can be made within ten years, so this is giving businesses leeway in regards to what other types of funding they can access.”
Ben Barbanel: “It’s very important to stress that we’re still very early on in the crisis and we haven’t yet felt its full impact. OakNorth tend to lend from £500k to £50m, and since lockdown we have taken around £1bn through the credit process.
“But only 40% of that has been part of government schemes and the rest has been lending outside of these. We have devised our own scenarios for how we see the pandemic affecting businesses and put together a COVID-19 vulnerability rating which ranks every sector that we lend to. We are trying to nail down how we think each company will be affected and if they can afford the debt they are taking on.”
Veronika Lovett: “We offer unsecured funding up to £250k and we did not participate in CBILS and the bounce back loans. Certainly, demand for non-government loan schemes did drop earlier in the year because it was hard for lenders to compete with what government was offering but we’re now seeing a slow rise in lending enquiries from businesses looking to explore solutions that will fund growth.
“It can seem like a negative picture and the extent of severity has not been felt fully and government schemes have been providing a lifeline that will at some point, need to come to an end.
“Still though, many sectors and regions have not been affected and when you look at the data at a granular level, it’s a much more positive picture than you’d think.
“Another trend I’ve seen is that some businesses that took out a bounce back loan may not have deployed it and are using it to re-finance pricier debt they have in the business, which is a smart thing to do.”
Roxana Mohammadian-Molina: “We are a peer-to-peer lender which focuses on the property market and small construction firms and we lend between £300k and £3m. It is coming up to a decade of when P2P lending first emerged as a solution to the global crisis and firms not being able to get funding and investors being penalised by low interest rates.
“Since then, £17bn has been funded in the UK through P2P lending. The trends we are seeing now is the growth of a more diversified investor spread and borrowers are forming closer relationships with lenders. We are also seeing more funding coming from high-net worth people and family offices.
“There are many more retail investors using the platform now too – from doctors and dentists to accountants. I think it has been good to see the tightening of regulations to attract retail investors.”
Maggie Rodriguez-Piza: “It seems the old ways of working may not be coming back so you need to look at who are the businesses that are getting funded by VC investors and fund managers. I would say that any portfolio company in a venture capital fund that proves it is resilient and has remained relevant will be receiving lots of support from investors and will be OK.
“Businesses that have not yet raised funding will be having a tougher time, as we have seen a shift away from backing early stage companies that do not have a proven business model. Businesses that can show they can thrive in this ‘new normal’ or help the digitalisation of business models – or looks at the future of work – will be well placed.”
THE DEADLINE TO RECEIVE A CBILS LOAN HAS BEEN EXTENDED – WHAT ADVICE WOULD YOU GIVE TO BUSINESSES AT THIS STAGE?
Andrea Reynolds: “In April, the liquidity wasn’t there in the market but we’re seeing more and more alternative lenders who can offer CBILS for businesses that are either high-growth or maybe going through a difficult trading period.
Platforms like Swoop are helpful because it can triage your business and put you in touch with the correct lender. Regarding advice, the fundamental one remains which is don’t take out a loan unless you can repay it.”
HOW ARE YOU SEEING TECHNOLOGY CHANGE HOW BUSINESSES ACCESS FUNDING?
Veronika: “There has been a clear shift in customer demand for simpler and digitised solutions that remove the hassle and allows you to receive funding solutions very quickly. We have seen an unbelievable acceleration of digital adoption due to the pandemic and an increase in the adoption of open banking, as SMEs consider cashflow and identify how they can access funding quicker. Even before the pandemic there was only one direction of travel in regard to technology and funding and this has only been accelerated.”
Andrea Reynolds: “It’s interesting, because before the pandemic the early adopters of platforms like Swoop tended to be younger entrepreneurs who were integrating open banking with their businesses and using our technology but we’re now seeing more mature businesses coming on and using the platform, as they often struggled to get somebody to answer the phone at the bank.
“We are seeing that entrepreneurs are now more willing to share their company data on our platform, to speed up decision making in regard to their funding. Technology is compressing the time it takes to get funding decisions, compared to going to see a bank manager and getting a no and then having to look at alternatives.
“As we are the marketplace though, we need digital adoption on both sides as we also require lenders as well as businesses to embrace it.
“To conclude, I would say we’re already at the auto-decision stage for funding decisions but when you look at more complex deals such as M&A and real estate you will need an element of hybrid that will be online and offline. You need somebody there to move it forward so a customer does not get stuck on an online journey.”
Ben: “We cover a wider part of the lending market, so if you’re funding up to £50m the borrower will be different. Having said that we use technology in the process, and we license a platform to other banks that they use in their underwriting and loan decision making process.
“You could say that we use technology to augment our decision making but we use people to make the decision; and at the later stages of the deal we’ve gone back to the older model where we bring the borrower into the process and have an old fashioned credit committee scenario.”
WHAT ARE THE FUNDAMENTALS YOU LOOK FOR WHEN LENDING?
Ben: “I am still surprised by the number of opportunities that come across my desk that aren’t debt opportunities and I think there is still confusion in the market as to what debt is and what equity is. Many businesses also do not come to us well prepared enough and we encourage them to use advisors so they can put together a sound proposal.
“Quality of the management team is also key, as you would expect, and it does surprise me when a borrower can’t articulate the levers in their business around how they can navigate uncertainty. Banks are not here to take equity risk, so borrowers also need to have their own skin in the game.”
Maggie: “Venture capital is similar to what Ben said in regards to the fundamentals to a successful pitch, but the main difference is that many companies will be better suited to equity because the issue with debt can be that you need to produce cash flows that can pay back the funding.
“There comes a point in the business when you reach that level and that is the growth stage – when more cash is being generated than is being invested and debt suits these businesses typically.
“But the fundamentals to being successful are similar – it’s about understanding cash flow models and building strong management teams. Equity investment can be more expensive though as you are giving away a chunk of your business.”
Roxana: “Regarding how technology is changing funding – the hybrid model is key for us. The eyes can tell more than the balance sheet, so you need to have the best of new and the best of the old – combining digital experience with human interaction.”
HOW CAN WE ENSURE GREATER DIVERSITY, WHEN IT COMES TO SUCCESSFUL FUNDING ROUNDS?
Andrea: “We’re seeing many more females leading businesses and gaining successful funding rounds on the equity investment and debt side, but the VC world still has a fair way to go and that’s where we are lacking space.
“Overall, the trends and trajectory are going in the right way for diversity.”
Maggie: “Absolutely the VC industry is behind but it has some done some valuable work in understanding where the issues are; as it’s about women and ethnic minorities often having less access to the network and the knowledge to shape a strong pitch. You have to have decision makers in funding reflecting a better balance of genders and ethnicities.”
COULD GOVERNMENT HAVE DONE ANYTHING DIFFERENTLY?
Ben: “Has it been successful is the key question? It has enabled businesses to bring funding into the market and I think time will tell to see if there will be any remediation on these schemes and whether they went far enough, or too far.
“Another question is, is it a lifeline that is kicking the problem down the road and causing problems further down the track?”
Andrea: “When you compare to Ireland and Australia for example, this government has been the most proactive on the debt side regarding making funds available and launching schemes quickly. Values and volume are much higher than other schemes in other countries.
“I am most concerned about the bounce back loan because from a lenders perspective it is too easy to obtain one. When we have debriefed in five years’ time, I think they’d say lesson learned on that.”