Funding Deep Dive: Time to Talk About Alternative Funding

High street banks were traditionally the main source of finance for SME’s, and the perception lingers that they are still the first choice for businesses seeking funding. The question is, are they the best choice?

The Dominance of the High Street Funding

In pure volume terms, high street banks remain the primary source of funding for UK SMEs according to data from the OECD. Digging a bit deeper however, those loans had declined over a an 8-year period from £189bn in 2011 to £167bn in 2019, just ahead of the pandemic.

As lockdown hit and various Government support schemes came into effect, bank lending to SMEs grew by 27.5% to £213bn in 2020 before again declining to £209bn in 2021, and then £195bn in 2022.

It’s reasonable to assume that there is still some way to go before high street lenders have re-balanced their portfolio’s to pre-pandemic levels, and borrowers will feel the impact of this in restricted appetite for lending.

During the same 8-year period non-bank corporate lending (covering growth/venture finance, invoice discounting, ABL and asset finance) almost doubled from £22.4bn to £40bn.

The Dominance of the High Street Funding
The Dominance of the High Street Funding

The Dawn of Specialist Funding

Following the financial crisis of 2008 the void that had been created by traditional lenders was filled by the specialist lenders – challenger banks, asset based lenders and private capital funds who saw an opportunity to support good UK businesses. In times of uncertainty they look to grow their lending books by supporting clients who aren’t getting what they want from their banks.

The numbers above demonstrate that their strategy works, and the funding market is now hugely diverse.

The British Business Bank’s Small Business Finance report give one indication of why the alternative lending market isn’t even bigger – their 2023 market survey shows that on average 59% of business owners only consider approaching one finance provider when seeking debt. Less than a third would consider approaching more than 1 provider.

The Dawn of Specialist Funding
The Dawn of Specialist Funding

What are a Business Owners Choices?

Naturally the first conversation will be with the bank, unfortunately that’s often where it ends even if the banks are unable to fund.

Understanding the financing options that are available is hugely important to putting the right funding structure in place for the longer term. Alternative lenders often compete on a point of differentiation – non-amortising structures, combinations of debt products, covenant/control lite, funding loss making businesses, social impact lending and a whole range of other specialist niches.

Knowing what these points of differentiation are, and how they influence your business is key to securing the best long term debt provider – and it often won’t be the bank.

In the next update we’ll look at the different types of alternative lender.

What are a Business Owners Funding Choices
What are a Business Owners Choices?