Having earned their place as part of the UK's lending landscape, so-called challenger banks are having a positive overall impact on the corporate loans market – helping to offset the rigid criteria applied by more traditional lenders. Some argue the time may now have come to introduce more controls but is that what the sector needs?
Taking a case-by-case approach to providing business loans based on trading performance, the disruptive influence of challenger banks, such as Metro Bank – the first to launch in 2010 – and others such as Aldermore and One Savings Bank – is helping to re-open lending lines and influence the way the lending market operates.
The willingness of challenger banks to be more flexible with lenders is driven by their desire to increase their share of the corporate loans market by drawing business away from competitors that are offering more rigid lending policies. Indeed, the market's shift in favour of challenger banks has been most marked since the economic downturn, when tighter lending criteria was introduced. The financial covenants or conditions of the loans offered by traditional lenders typically include strict stipulations about the security offered by the business and its track record in terms of trading performance. For this section of the market, the fear of accumulating 'bad debt' is an inherent part of the lending decision.
By contrast, challenger lenders do not have the same level of residual bad debt to contend with and, therefore, they are less constrained when it comes to applying more flexible criteria for borrowers. Typically, challenger banks have a shorter chain of command and operate with less bureaucracy than their traditional counterparts.
Whilst their influence is wholly positive at this particular point in the economic cycle, history tells us that if left unchecked, more flexible corporate lending criteria could store up problems in the future. Helping to illustrate this is the unrestrained lending on commercial property that contributed heavily to the recent economic downturn.
So what will the future hold? The Prudential Regulation Authority (PRA) may start to take a closer look at the activities of challenger banks. To put this in context, other banking products, such as residential mortgages, are already heavily regulated. Following the credit crunch, a similar regulatory approach may now be needed to set clear parameters to guide lending practices in the corporate loans market in the future.
In the meantime, there is certainly a window of opportunity for businesses to take advantage of some of the favourable lending terms on offer. However, securing a loan from a challenger bank is by no means a dead cert and applications still need to be approached in the right way. Some sectors are likely to find it harder to secure finance than others. For example, Leisure-based businesses such as restaurants and bars are likely to be treated with a higher degree of caution. Even so, there are stronger players within this sector, such as casinos, which are seen as safer bets (forgive the pun!) as a result of their more robust and immediate ability to generate revenue.
In the short term, uncertainty about inflation and other destabilising factors such as the General Election mean that corporate lending criteria is unlikely to relax too far. The call for regulation to help control the corporate lending market is also likely to continue and will help to ensure there is a level playing field for all.
Vicki Simpson is a partner at Shakespeares