Bounce back loans will cause bounce in alternative finance

Bounce Back Loan Scheme (BBLS) losses and fraud will see more SMEs turned away from banks, says Steve Richardson, Sales Director at Reparo Finance.

Recent headlines have focused on how payment defaults and fraudulent borrowing through the Government’s BBLS scheme could amount to anywhere between £15bn and £26bn.

The immediate reaction has been that these eye-watering figures, released by the National Audit Office (NAO), will ultimately end-up costing tax-payers. While this is true, SMEs will also pay a high price for this situation.

The SME Funding Gap is Set to Widen

After the financial crash in 2008 and the subsequent recession, we saw a trend of banks restricting lending to small and medium-sized businesses. SMEs were either considered too high risk or low value by traditional lenders. These businesses became the ‘unborrowables’, which has contributed to an ever-growing funding gap when it comes to SME financing requirements. The SME Finance Forum estimated this gap to be around £3.8 trillion globally in 2018.

This funding gap will be accelerated by rock-bottom interest rates, economic uncertainty and high corporate debt. Add to this the costs of unpaid Government bounce-back loans and fraudsters exploiting a lending system more focused on emergency access rather than proper due diligence, and you have a perfect storm that penalises SMEs.

Banks will now make SME borrowing even more rigid as they become increasingly risk-averse towards SMEs. With the ever-changing coronavirus policy, we’re no closer to ‘normality’. In these circumstances, it is much easier for banks to strike a line through SME lending, rather than build a risk-weighted lending model.

Bank Lending May Become a Box Ticking Exercise 

Many banks will ignore SME funding requirements by dressing up rejection in the niceties of the Bank Referral Scheme. This redirects SMEs to other lenders with no real appreciation of why the SME applied in the first place.

Perhaps banks will entertain some low level of SME lending as a box-ticking, reputation management exercise. This is likely to be a slow and painful application process for SMEs, which is more concerned with filling out the right forms rather than the lender understanding the people and company seeking finance.

Alongside the banks’ reluctance to lend, there are likely to be logistical challenges. Banks are stretched at the moment, partly from processing government loan schemes and due to other challenges the pandemic has presented. Many banks may not have the resources to dedicate to the tricky business of SME lending.

A Bounce in the Alternative Lending Market

With the backdrop of even less engagement from traditional lenders plus the increased need for funding, SMEs are turning to alternative lenders.

Lending to SMEs is complicated; when financing these businesses, it’s harder to value risk and make lending decisions. Many of the companies have limited financial information, atypical cash flow or operate in verticals that lenders don’t understand.

In many circumstances, the alternative finance market can provide viable alternatives to SMEs. There are an array of lenders that specialise in different products and sectors.

Accessing Alternative Finance

When SMEs start to access alternative lenders, they stand a good chance of finding a lender that will have a product that fits. They will undoubtedly find lenders willing to have a conversation to understand their circumstances.

Whereas once SMEs weren’t clear on the options outside the banks, they’re becoming increasingly savvy about their range of lending options. This has led to the bounce in demand for alternative lenders, which is likely to grow as the pandemic decreases SME lending from banks.

With so many options, an excellent place to start is a commercial finance broker or your accountant. These professionals have access to the alternative lending market and can help you find the right lender.

In a world where traditional lenders may be seeing SMEs as even higher risk, it will be alternative lenders with their broad range of products and willingness to listen that will fill the gap.