An Over-Reliance on Bank Lending? Fladgate Urges Smes to Look Beyond Banks When It Comes to Financing Options

• Half of UK SMEs have looked to raise extra financing since the start of the pandemic, however almost half (46%) have done so with limited or no success
• Businesses are failing to capitalise on the broad range of financing solutions available, with bank lending remaining the most popular way to raise money by a significant margin
• This is despite over one in three (37%) private investors being willing to support distressed SMEs
• As government support winds down, Fladgate urges SMEs to consider alternative finance and private investment for support and partnership

As government support draws to a close and UK SMEs continue to battle through the coronavirus pandemic, many businesses are failing to appreciate the range of financing options available to them, according to research by Fladgate, a leading law firm serving the SME market.¹

As they contend with the economic fall-out of the pandemic, Fladgate’s Restart Capital report found that half (50%) of UK SMEs have raised funds since the start of the pandemic in a bid to resolve cashflow issues, devastated sales and rising bad debt. However, these businesses have been failing to capitalise on the broad range of funding solutions on offer to them, with bank lending remaining the most popular financing route for these firms by a significant margin.

The research found that of those SMEs which have raised funds (or are in the process of raising funds), one in four are looking to high street lenders. This leads all other forms of funding, including asset-based lending, bridge loans and alternative debt (the second most popular method).

More strikingly, of those who are considering their financing options, bank lending is the runaway source of funding, with an overwhelming 49% considering turning to the banks (see figure 1). This is nearly double the number looking to the next most popular source of raising funds (crowdfunding), and far outstripping alternative solutions such as private placements, equity and turnaround financing. Alternative financing solutions are being considered significantly less, despite ample investor appetite.

Fladgate sees this awareness gap as a detrimental over-reliance on the banks, which can’t cope with the volume of cash needed to protect the UK’s distressed SMEs (one third of which do not expect to be in business this time next year as a result of the pandemic).

SMEs and investors both searching for active partnerships

Fladgate’s pulse-take on private investors in the UK found that they are ready and willing to support the UK SMEs through alternative financing, with over a third (37%) of private investors willing to support distressed firms. Private investment represents a source of untapped dry powder, bringing badly needed cash – but also the expertise and contact book of investors with experience of giving strategic advice to struggling companies.

Restart Capital found that SMEs recognise the benefits of an active partner. Three in four (77%) SMEs raising money want a capital provider that will be active and engaged, a role that is more easily fulfilled through private investment – and something 85% of investors polled are willing to provide.

Fladgate urges Westminster to encourage flow of private investment into struggling businesses

As government support for businesses in the wake of the pandemic starts to wind down, Fladgate is calling on the Government to introduce a series of ‘quick win’ policy measures which could promote private investors as a finance solution for SMEs, and encourage the flow of private investment into troubled businesses. These measures include:

1. Tax incentives for investments into distressed business (similar to the popular enterprise incentive scheme but adapted to fit typical distressed investors)
2. Delay the introduction of preferential status for HMRC, currently scheduled to be introduced in December 2020
3. Government guarantees for loans or other risk sharing for private investors (similar to, but broader than, the CBILS scheme)
4. Grants for early advice on strategic options for SMEs

Jeremy Whiteson, Partner at Fladgate commented: “The turmoil caused by the pandemic has been unprecedented and we fear very significant disruption to the business community to come. There is an urgent need to find solutions for cash flow pressures on businesses. Many will not meet bank lending criteria and so a new approach is needed.

“With almost half of businesses finding their fundraising efforts are unsuccessful, it’s time to rethink the ‘one size fits all’ approach many firms take to financing. Private investors can offer a broad range of alternative finance options which can offer so much more than a capital injection, providing support and strategic guidance as businesses continue to navigate these uncharted waters.

“As government support draws to a close, private investors are primed to step in and act as a lifeline to the UK’s SMEs. We’re therefore calling on the government to encourage and facilitate the deployment of private capital to provide vital support for the bedrock of the UK’s economy.”