This article is based on data provided by the recent British Business Bank SME Finance Markets Review 2022, together with our knowledge and understanding of the market and the changes we have seen. It shows both from the data and our experience that more and more business finance for SMEs is taking place away from the big banks.
First some data and comments from the report:
Lending Values
- Gross ‘bank’ lending flows rose by 12.8% in 2022 to £65.1bn – this is back to just above the pre-pandemic levels now.
- Of the £65.1bn figure, challenger and specialist banks accounted for 55% of it, which is the biggest differential between them and the main high street banks on record. Challenger and specialist banks have actually outpaced the high street banks every quarter for the last 7 quarters.
- Net lending itself fell but this was mainly due to repayments of COVID loans
Comments
- The levels of approvals from the banks declined from previous years.
- The main reasons for seeking finance were (in order of percentage) working capital, purchase of fixed assets and investment in growth.
- A higher proportion of SMEs used more than one finance provider.
- 4 in 10 SMEs used trade credit to reduce their need for external finance, i.e. extending credit terms.
Asset Based Lending
- Asset based finance increased 11% to £22.5bn
- Invoice and asset-based lending volumes are almost back to pre-COVID levels although the number of customers using these products remained about the same.
Equity
- Equity deals continue to support SMEs. There was an exceptionally strong H1 2022 but the overall market slowed in H2 2022. However, seed/early stage investment held up well and was stable.
- VCs continue to have lots of dry powder, i.e. money to invest into 2023 and beyond.
One of the main conclusions of the report is the outpacing of the major high street banks by the challenger and specialist banks. This is without the inclusion of other alternative forms of business finance, so if you added this in as well it would be much higher than 55%.
Our Experience of the Market
This very much fits with our experience. In the debt markets we operate in (£500k to £30m lending amounts) we have access and deal with over 250 providers of business debt finance. The reason our commercial finance business was called Snowball Alternative Finance in the first place was because we were operating in the market beyond just the major banks and wanted the company name to say exactly what it does.
Whenever we look at a debt requirement at Snowball, we consider what the right type of funding should be, how much the funding should/could be and of course the need to prove serviceability of any finance taken out.
Then we will look at who could provide the right debt funding for that client. We operate a very different business model of complete independence across the market by not taking any fees/commissions from lenders, and so it means we can speak to any lender out there. We are always looking for the right deal for the client and the right fit between the client and lender and never how much commission the lender will pay, given we don’t take any fees from them.
Of the 250+ debt funders we work with, all the major high street banks are included, and are considered alongside all the others every time we are working on a deal. Given the balance sheet strength and ability to borrow money cheaper than anyone else, the high street banks are able to provide the cheapest funding offer. However, to obtain that pricing, the deal must fit every one of the items on their ticklist, and if it misses one, it will likely not be a deal for them. You also must be a little careful that although they can and should be the cheapest, it doesn’t always mean they are the cheapest, and hence where our experience and knowledge comes into its own.
Not all about Cost
Now of course there are good and poor banks and good and poor people in each of them and the aim is to try and find the good bank with the good people! Some banks are better at some sectors than others. There are some great people working in the high street banks, but they can often be tied up by internal rules and processes outside of their control.
Naturally it is not all about the lowest cost, and there are many other factors that go into choosing the right debt provider, and we take all of those into account before putting the shortlist before the client. But after all these elements the deals we source are less and less with the high street banks, which mirrors the findings of this report.
As further proof of this, it is telling that out of all the business Snowball transacted in the debt markets last year only 10% of it was with high street banks!
What are the Alternatives?
I agree that many SMEs are using more than one funding provider and many have bank accounts at more than one bank now. Quite a lot of firms have a high street bank account and then an account at one of the online providers like Starling or the likes. This was something that became very apparent following COVID. Options and flexibility can be very useful.
Asset Finance has grown as more firms use this type of funding for their vehicles, plant and machinery and equipment. It is better suited to matching the right finance to the asset and keeps it away from overdrafts and normal working capital, where it just gets lost alongside everything else.
I have seen more Asset Based Lending deals transacted in the last 12 months as it encompasses all the assets of debtor, stock and plant and machinery, and so can be a very useful type of funding. Invoice Finance deals still seem to be a lot of the same deals moving between different funders than necessarily new funding lines.
And Equity?
I agree that equity deals have had a mixed 2022. The markets started very well but slowed in H2 in part due to extra due diligence and the time taken for a transaction and to a smaller extent, appetite. The corrections in the tech space on valuations and share prices have seen an appropriate correction in the tech space for equity, but deals are still being done. There remains a considerable amount of money available for investment, but the time taken to source it has definitely slowed.
Overall, the debt and equity markets remain very much open and there are still billions of pounds of deals being transacted every year. The market has changed and there are now hundreds of providers out there and therefore the options of the funding types and the providers has greatly enhanced, but you must know where to look.
The Snowball Offering
The beauty of our offering is that we see the whole market and we carry out that work for our clients. We don’t have a panel of 20,30 or 50 lenders that we go to every time. We have over 550 debt and equity providers and we go to the provider with the right deal for the client based on our knowledge and experience. It is pretty much a full-time job for us keeping up with all the funders and their appetites and interests, but we do that so the client doesn’t have to, but can be confident that they are receiving the right deal for their needs.
If you wish to speak to us to see how we can help on a debt and/or equity fundraising, then please get in touch.