A changing funding landscape

Over the last decade or so the funding landscape has changed fairly dramatically. This is largely down to the increase in alternative lenders and the growth in the number of finance brokers, as well as major changes to operations within banks, which has seen a wealth of experience come into the market.

Add the impact of the recession of 2008 and the last 18 months battling Covid 19 and you can see how and why change has been inevitable.

Gone are the days when as a business owner you could ring your bank manager, discuss a potential deal and have a decision (plus the money!) within days. Massive changes to the way decisions are made and the reduction of relationship management type roles has meant that bank employees don’t see their clients as often – not at all in lockdown of course – and are much more likely to know very little about their business.

It used to be that as a broker we were always the second call the business owner made, having already called the bank, either wanting us to present other options, or to have us as a backup just in case the deal was declined. Nowadays as a broker we tend to be first in line to review the case and identify the most appropriate funding solution, evaluating products and options across the whole of the market.

SMEs who often find it difficult to access finance outside of the traditional banking sector may then turn to alternative lending. Providers in this space are increasingly meeting this demand with products that are easy to understand, supported with speedy decision- making. This is gaining significant traction for them in the marketplace.

Also, many of the independent lenders, leading with service and flexibility, are providing stiff competition to traditional banks. They have taken up the mantle of the old-fashioned bank manager, understanding the business and delivering a tailored solution.

Market conditions almost always dictate whether access to finance is easy or not, so lenders have to adapt and evolve their product portfolios. Changes in risk profile mean some lenders will no longer have the same appetite to take on cases considered challenging, while, at the same time, other funders see an opportunity to step into the space that has been left.

This isn’t a criticism of the banks at all. Under the Government support schemes they have had to deal with unprecedented numbers of enquiries. The challenging market conditions, as well as the loan application process, are likely to mean that banks, in particular, will have to focus more on their current client book.

Indeed the Office for Budget Responsibility has predicted a default rate of 40.4% on Bounce Back and Coronavirus Business Interruption Loans in the SME sector, with £27.2bn of loans expected to be written off.

So we certainly expect to see the High Street lender less engaged in funding opportunities. In fact over the last five years, we have seen considerable increases in debt and equity finance while bank lending has remained generally static.

Looking ahead we anticipate a growing need for working capital solutions as the economy starts to get back to normal and SMEs are faced with a new set of challenges. There will be increasing demands on cash. In addition, some business owners will be presented with acquisition opportunities which will need to be well financed.

All in all, the funding landscape has shifted considerably. Many factors have influenced the changes and will continue to do so, but, at the end of the day, SMEs will still need finance, lenders will still lend, in traditional and non-traditional space, and the intermediary community will continue to play a role in finding the right solution from an increasingly diverse range of options.

Reach Commercial Finance

email: mike@reachcf.co.uk
website: www.reachcf.co.uk