The SME lending landscape in 2020

By Aaron Hughes, Managing Director of Equiniti Riskfactor, a leading provider in the commercial finance industry, examines the SME lending market for the coming year and the importance of risk management to lenders.

Aaron Hughes

This time last year,I only made one prediction with any degree of confidence – that at some point, the UK’s future trading relationship with the rest of the world will be settled, and confidence and stable growth would return.

And I still stand by this a year later!

2019 was a tough year – for business and lenders alike. Although final quarter figures are not yet available, annual UK growth to September was just 1%,and both August and September showed a contraction in the economy.

Atradius are predicting 2019 to have had a 10% increase in business insolvencies – the highest rate in Western Europe – with a further 5% increase next year.

Meanwhile the Bank of England have revised downward their forecast for growth for next year to just 1% – and that is dependent on the end of Brexit uncertainty, an orderly transition from the EU, and businesses being properly prepared.

In this context, it is hardly surprising that the EY ITEM Club outlook on business investment shows lending growing by just 2.1% in 2020, the lowest level since 2015.

Away from these dry statistics and speaking to our customers in the Invoice Finance community, I pick up a sense of what these numbers actually mean.

The last 12 months of uncertainty has squeezed SMEs even further.Some of the very limited growth we have seen has come about only because of businesses increasing stock levels to protect themselves against potential Brexit related supply chain issues.

This has been a cause of cash flow issues for some,but in a shrinking economy, for others the increasing cost of materials,and the ever-worsening risk of bad debts,create particularly difficult trading conditions.

Amongst SMEs who use invoice finance,some of the cash flow bottlenecks can be smoothed out with the flexibility a receivables-backed facility can offer. But a bad debt or a drop in turnover can quickly lead to a crisis.

From the lender perspective too, increased competition in a market where lending growth is slowing means some challenging strategic decisions need to be made.

We have seen lenders responding by scaling back their risk profile, some withdrawing from whole sectors. Butothers have taken up the slack, flexing their risk appetite to take market share.

This has led to healthy competition in the market -and not just for the better-quality invoice finance deals. Higher risk,less “traditional” deals are also being chased, and across the board we are seeing some downward pressure on fees.

As a result, everyone is looking to improve their efficiency and safely manage more accounts with the same or reduced headcount. Consequently, we are seeing increased demand for Equiniti Riskfactor services – for our core risk management products from new lenders and for our additional modules from existing customers.

Equiniti Riskfactor products are built to support invoice lenders in these uncertain times. Client failure and fraud are increasing risks, while cost pressures and the need to maintain market share are key strategic drivers.

Having the tools at your disposal to safely support increased lending to the SME sector in 2020, with greater efficiency, will ensure those strategic goals are met,which will in turn help SME’s navigate potentially choppy and uncharted waters ahead.