In its November inflation report, the Bank of England made it crystal clear that the way in which we exit the EU will be critical to the performance of the UK economy in the short to medium term.
“The economic outlook,” it stated, “will depend significantly on the nature of the EU withdrawal, in particular the form of new trading arrangements, the smoothness of the transition to them and the responses of households, businesses and financial markets.”
Put simply, 2019 is shaping up to be a decisive year for UK businesses. In fact, it’s arguably the most decisive year since 2008, when the world was turned on its head.
But whereas in 2008 and 2009 the talk was of a ‘credit crunch’, this time around the exact opposite is the case.
As we enter 2019 and all the unknowns it brings, the funding lines available to UK SMEs have never been more varied and robust.
Smaller businesses are being catered for by the ever-growing ranks of alternative finance lenders that have emerged since the financial crisis. Come to think of it, some are now so established as to be almost considered mainstream. For the largest businesses, banks continue to be the lenders of choice.
If there’s one area where borrowing for SMEs has been more challenging in recent years, it’s for medium-sized businesses — those firms that are a little too big for the comfort zone of the alternative lenders and a little too small and ‘risky’ to meet the stringent underwriting criteria of the high street banks.
But even that’s now changing, despite Brexit.
Over the past year we have seen a rise in the number of major institutional lenders — think pension and asset management funds — start making loans directly to established UK businesses seeking growth capital (the Ms in ‘SMEs’). Reflecting that, our own institutional funding lines just passed £0.5 billion, which is hardly small fry.
These giants of the financial services world are entering the SME lending market because, in the ongoing low-interest-rate environment, they’re after decent returns like everyone else.
Crucially, they see established companies with strong track records and big growth plans as offering the right balance of risk and reward.
The loans they’re offering, with rates starting from as little as 4%, are available to firms in pretty much every sector. They’re being offered in the form of structured and asset finance, HP and leasing arrangements, bridging facilities, cash flow and straightforward unsecured loans.
Business owners will typically be introduced to these big institutions through an intermediary or platform and the good news is they can be even quicker than a bank when it comes to delivering the cash.
This is because they tend to do their due-diligence in-house rather than through external providers, cutting completion times by up to a third.
The institutional lenders now emerging also tend to offer longer loan terms, some of which go up to eight years, compared to five years for a typical bank. This offers greater flexibility and helps to reduce repayments, therefore bolstering firms’ cash flow.
And one of the biggest surprises relates to the costs of procuring these loans. One lender we have access to charges a flat fee on unsecured loans of just £20,000, irrespective of whether a business is applying for a £500,000 or £5 million loan. On the high street, a £5 million loan could easily rack up fees 10 times that.
In the Autumn budget, chancellor Philip Hammond announced pension funds would be supported by the British Business Bank to invest in growing businesses through ‘patient’, or long-term pooled capital.
In reality, this has already been happening: pension funds and asset managers are increasingly looking to invest in growing businesses, at scale — and they’re choosing to do so directly using platforms.
As a result, and despite the radical uncertainty of Brexit, the future for companies seeking growth capital, which fall into that awkward gap between big and small, has never been as bright.
Ayan Mitra is CEO of the SME debt finance platform, CODE Investing.