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How non-bank lenders can plug the funding gap for SMEs

Toby Furnivall, CCO of Leasing and Lending, Triple Point

SMEs are at the heart of the UK economy, accounting for three fifths of employment and around half of total turnover in the private sector. Despite their vital importance to the country, many SMEs have been struggling to receive financing from mainstream lenders since the financial crisis in 2007-08. The fallout from the Covid-19 pandemic has further limited support from bank lenders to furnish SMEs with the critical funding needed.

Many of these growing and newly established businesses rely on sophisticated backing between £1m and £10m to fund growth, stock or changes in management structure, but are often faced with limited options. As a result, alternative finance providers are increasingly called upon to support businesses with a number of lending strategies, such as asset-based finance, peer-to-peer lending, or direct lending and leasing.

Formerly a space largely occupied by banks, these alternative lending providers are increasingly critical in helping new businesses and established SMEs secure the financing they need to help underpin both their own and the country’s economic growth.

Non-bank lenders are filling the gap 

The past 18 months have been challenging for businesses. Uncertainty about the severity and longevity of the Omicron variant and the winter ahead means that these challenges are far from over. In addition, supply chain issues and personnel shortages are having a significant impact at a time when businesses would have hoped to be able to focus on recovery.

On top of this, funding has been difficult to obtain since banks have been overstretched due to their support for existing borrowers and for putting a liquidity premium on rates, penalising those that require funding. As a result of this, management teams have faced limited opportunities to access swift, responsive, and tailored financing solutions for their needs.

With bank lending criteria remaining tight, non-bank lenders are increasingly stepping in. The sector is now estimated to provide 30% of all SME financing according to a recent report by UK Finance, illustrating the vital role alternative lenders play. Yet non-bank lenders have faced their own challenges. For example, non-banks do not have access to Bank of England liquidity schemes, and many have not been able to participate in government lending scheme.

Despite these challenges, lenders have worked hard to accommodate clients, whether through rapidly adjusting their business models to cope with increased demand for lending or allowing for payment deferrals, as well as refinancing debt and obtaining additional lending from wholesale banks and the capital markets where possible.

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Leasing and lending can relieve funding pressure 

Among the various financing mechanisms, direct lending and leasing have proved to be among the most successful. Direct lending, often via private debt or credit funds, provides fast and tailored access to funding for SMEs and helps support them across all of their financing needs, including acquisitions, shareholder realignments, MBOs, capex programmes, roll-out strategies and re-financings.

Direct lending can take a number of forms, including an amortising loan which is repaid periodically, or a fixed term interest only loan, which is repaid after an agreed timescale. Some SMEs might require a revolving credit facility, allowing for even more flexibility in reacting to the ever-changing needs of a business.

A further option for SMEs is the leasing of business-critical assets, such as machinery or vehicles. This can provide businesses with quick access to vital tools and infrastructure, ensuring that their operations can continue to run smoothly, even in times when cashflow is limited.

Triple Point has played a role in providing support, with our Leasing and Lending Team providing over £250m of financing to UK-based organisations since the start of the pandemic, helping flourishing businesses and able management teams accelerate their growth.

Wide-ranging benefits

Leasing and lending strategies can be instrumental in relieving financial pressures across both the public and private sectors. Further, products based on lending and leasing strategies can bring benefits to investors, offering attractive yields that are uncorrelated to traditional asset classes and unaffected by market volatility.

With new businesses and established SMEs bearing much of the economic brunt of the past 2 years there is now a growing recognition that the financial services sector and the alternative financing arena can and should do more to protect SMEs and help them thrive. The UK is home to some of the most innovative and impressive businesses, and the non-bank lending sector has an important role to play in enabling them to flourish.

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