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The Current Picture Of Non-Bank Lending In The UK

The British lending market has undergone a seismic shift in the past decade. What appeared to the consumer to be a healthy lending market was suddenly swept from under their feet, to be replaced by a far more cautious banking sector – and leaving the country’s small to medium businesses with a funding gap.

In 2012, the Federation of Small Businesses shone a light on a struggling sector, highlighting the lack of choice when it comes to credit.

Simultaneously, the British Government threw its weight behind campaigns to increase the prevalence of non-bank lending – helping give rise to a generation of asset based lenders ready and able to offer businesses access to cash in a responsible and affordable way.

There are now as many as 40,000 UK businesses using asset based lending at any one time[1], plus many more using asset backed lending. Meanwhile,the British Business Bank reports that asset lending saw a 12% year on year increase in 2017.

Societal changes have amplified the demand for non-bank services. For example, the vast majority of consumer loans are now made online, a trend which is beginning to replicate into business loans. In 2017, CYGB acknowledged that 35% of SMEs find accessing bank finance a challenge. Bank lending to SMEs totalled £0.7bn in 2017 – down on 2016’s value – according to British Business Bank figures.

Ed Rimmer, from asset based lender One pm Finance, said: “There are lots of things that stand in the way of small and medium businesses getting hold of finance to further their business. The largest barrier, though, is the risk aversion of the big banks. Needing a minimum number of years’ accounts and profit history, for example, could be impossible, or banks may ask for too much security.

“Asset finance is in growth and has been for some years now. Businesses have turned away from banks and towards lenders able to offer them what they need, quickly and on flexible terms that work for them,” he added.

Indeed, the Finance and Leasing Association’s most recent figures show the asset finance market recorded its third highest monthly new business total in March 2018 – at more than £3.3bn. Larger asset loans, such as agricultural or construction equipment, suffered a slight dip in value, however, which the FLA attributed to a slowing in the UK economy as a whole. ONS figures from May 2018 echo this, indicating that construction output fell in Q1 2018 – citing poor weather as a possible cause for delay.

Richard Arnold, from Bradgate Business Finance – a specialist in asset finance within construction, recycling and haulage – said: “There’s no doubt that asset finance performance is swayed by the UK economy as a whole. In times of uncertainty, businesses naturally become slightly more cautious about taking out finance. However, at Bradgate, we specialise in hard asset finance with particular emphasis in the construction and agriculture sectors, and we are growing quickly.

“It’s understandable that taking out loans is met with a level of tentativeness when faced with challenging market indicators, but for those who take the risk the pay-off is notable, and we find that a vast majority of our clients return for additional asset loans in future,” he added.

The various forms of non-bank lending are many. Aside from soft and hard asset based finance, the UK business can also investigate peer to peer lending, crowdfunding, invoice finance and factoring, vehicle finance – and many more besides. Global giants like Lloyds and Bibby have carved incredible success curves thanks to the changing demands of the everyday business. For many businesses, though, the giants are still out of reach, with minimum lending parameters beyond their grasp.

The Government’s Industrial Strategy green paper of January 2017 outlines 10 pillars of growth – one of which is supporting SMEs to start and grow – stating: “We must ensure that businesses across the UK can access the finance and management skills they need to grow; and we must create the right conditions for companies to invest for the long term.”

Timely access to finance can be transformational for a small business, as Alun Winter, from Intelligent Loans, explains: “Whether for asset purchase, recruitment or investment in R&D, businesses can alter their prospects with finance. We’ve helped thousands of businesses keep moving with cash flow loans, second mortgages or asset-backed funds – helping them succeed where they would otherwise be unable to progress, at great risk to their future. SMEs are the backbone of the UK economy and they need support in the form of access to finance so they can realise their full potential; non-bank lenders are able to provide this.”

The UK economy has grown by over 14% since 2010, as reported in the Industrial Strategy green paper, second only to the US, while employment is also seeing good reported numbers – with 2.7m more people in work than in the first quarter of 2010. And, despite Ben Broadbent’s now infamous ‘menopausal’ economy comments of May 2018, productivity indicators are not discouraging, according to Ian Smith, CEO of 1pm plc, which provides a full suite of non-bank lending services to UK SMEs.

He said: “It’s true that there is a reported slowing of productivity in the UK; however, the small and medium business sector is thriving. The UK ranks third in the world for the number for start-ups and SMEs account for 5.7 million businesses in the UK, which equates to more than 99% of all businesses in the country. This booming SME sector is full of life – but it’s been choked by a lack of traditional access to funding. There are now a lot more options available to small to medium sized businesses. Access to finance is the key to unlocking their growth potential.”

While the UK ranks third for start-ups, it comes in at 13th for the number of businesses that successfully scale up, according to OECD research. A potential cause of this is an under-supply of long-term funding and later stage venture capital.

“The picture for non-bank lending is a world away from what it was a decade ago,” added Ian Smith. “But there’s still a way to go before every business owner understands their options, has access to finance of varying types and terms, and uses finance effectively to further the business prospects. An example of this in action is the changing reputation of invoice financing – which in the last 25 years has gone from being a last resort to being a regular feature of many successful businesses.

“While around 30% of SMEs will probably never touch finance of any type, there’s still an enormous number of small businesses who are willing to take the leap, invest in their future and reap the rewards. The non-bank lending industry is healthy and will continue to provide essential services to UK businesses.”

[1]UK Finance, BVRLA, Association of Mortgage Intermediaries