Peadar O’Reilly, Managing Director of the Praetura Group’s Lending Division, shares his thoughts on how the economic recovery landscape has changed and why the alternative lending market will continue to be a key facilitator in supporting the growth of UK SMEs.
Historically, many businesses have gone bust coming out of a recession. Conventional wisdom suggests that companies starved of working capital struggle to recover from downturns and often fall into insolvency. In a large portion of such cases, this stems from a mismatch between a business’s cash requirements and readily available finance options.
This rationale governed recessions of the past, however we will see far less cash starved businesses going bust from our latest economic dip, thanks to the new market conditions shaped by the events of 2008 and 2009.
In 2008 we saw the failure of large high street lenders create a shattering effect on western economies. Following one of the most severe economic crashes in recent financial history, some lenders went into ‘crisis mode’, subsequently resulting in ‘risk averse credit decisions’ being made that inhibited most corporates accessing capital.
Companies looking to rebuild their positions post-recession found themselves with both diminished cash reserves and limited finance options. Due to tightened credit criteria, many failed to meet major high street lenders’ high credit hurdles and low risk appetites, so their loan applications were turned down. These lifeline loans were vital to the success of the SME sector, but with nowhere else to turn, business leaders were often forced to close their doors. At the peak of the financial crash in 2008, 6,961 insolvencies were recorded in just one quarter, the highest recorded in UK history. However, even as the economy recovered, insolvencies remained at record levels hovering around 5,000 per quarter for the following four years.
This shortfall in the supply of mainstream debt finance against an ever-increasing demand from businesses led to the boom in ‘alternative lending’ that has been evident over the last decade. Unfulfilled funding requirements were met by non-bank lenders who had greater flexibility to evaluate a business beyond its direct credit history and a more focussed and agile approach when it came to assessing credit worthiness. Property, asset and invoice based lending sky rocketed as a myriad of funding structures were developed to better meet SMEs constantly evolving requirements, particularly those trying to grow their businesses and support that increase in working capital resulting from such growth. Whilst a handful of alternative lenders existed before 2008, they were typically siloed into specific sectors and centred around niche deals and specific situations.
The landscape that emerged was sometimes difficult to navigate for business owners in terms of understanding the available options and determining the suitability (or otherwise!) for their situation. Growing pains led to some poor attempts at solving the problem. For example, peer to peer lending had questionable results for both lenders and borrowers alike.
The number of specialist commercial finance brokers increased following the rise in these ever-evolving lending options and played an important role within the alternative lending sphere: helping match SME requirements to the different types of business funding options available. This forged clear routs to market and better service levels, helping the market mature and develop into a robust tool SMEs could use to access appropriate finance from trusted lenders to support their growth ambitions. This in turn led to the continued and exponential growth of the alternative lending market.
The market for alternative lending has continued to expand over the last ten years through an accelerated demand for finance from SMEs after the financial crash.
Weak business models can be exposed during a recession and ensuing credit crunch, but a lack of capital shouldn’t limit those businesses that can prosper. For example, complex industries such as automotive and aerospace manufacturing have long production lead times with a web of subcontractor relationships. As the economy recovers from a recession, these types of businesses tend to require additional working capital support to allow them to capitalise on growth opportunities in the medium term. Many have successfully turned to alternative lenders to provide financing structures that are dynamic and holistic in their nature and will continue to do so for the foreseeable future.
Many trusted financial brokers are extremely familiar with the shortcomings of traditional lenders and are experienced enough to easily determine the most appropriate funding structure, and indeed access that funding from relevant alternative lenders with whom they have strong relationships, on their clients’ behalf. Tom Brown, one of the directors from PMD Business Finance in Greater Manchester said “The alternative finance marketplace has been buoyant for the past ten years and this has only been amplified further in the last 18 months as the high streets continue to reel from the pandemic. Business owners want to work with brokers and lenders who understand their business fully and can explore a number of different options to support their needs.
“The funding options available to SMEs are wide ranging, it’s not a case of one size fits all, or sticking all your eggs in the bank basket anymore. With greater visibility of the range of options available, business owners seem to be more keen than ever on funding their debt structures with a number of external providers.
“Well established and reputable brokers, working in partnership with trusted lenders are perfectly positioned to support this transition”.
The recent pandemic is likely to have compounded the growth of alternative lending by the nature of the market uncertainty. In early 2021, law firm Walker Morris released data to suggest that 45% of UK businesses are still uncertain of the options and relative merits of the various forms of alternative finance. However, UK government backed Covid loans such as CBILS (Coronovirus Business Interruption Loan Scheme) and BBLS (Bounce Back Loan Scheme) have helped open the minds of UK SMEs to the merits and availability of non-bank lending options available to them. Continued efforts need to be made to help business owners understand, assess and compare complex fee structures and legal implications of this myriad of choices and Financial Brokers can be of great assistance in this regard, from an independent advisory perspective. Trusted brokers and lenders themselves urge business owners to stay diligent when choosing both a funder and a funding structure. Accreditations and memberships to trade bodies, such as NAFCB, are an indication of the stability, professionalism and reputation of individual Lenders and this can assist business owners to make sensible and safer decisions when it comes to choosing lending partners.
Despite a swirl of negative media comments, the UK economy remains in a relatively robust position with cause for optimism. In July 2021, the Office for National Statistics (ONS) released data showing that 85% of UK businesses are confident of long-term survival. Now, as the UK Government urges our economy to ‘build back better’, the alternative lending market will be a key facilitator to and supporter of this growth. Debt in the right form and substance should be seen as a crucial part of a company’s financial ‘arsenal’ to allow it to increase its firepower and thereby help elevate growth plans and strategic objectives rather than merely as a financial burden to be tolerated. Access to appropriate and properly structured debt funding is a key advantage in a competitive and constantly evolving marketplace.