Availability of debt finance for UK SMEs – addressing the common misconceptions

17 Feb 2016

Availability of debt financing for UK SMEs – addressing the common misconceptions

The lending environment for UK businesses is significantly different to how it was before the financial crisis of 2008. Alternative lenders have entered the SME lending space, which was previously dominated by traditional banks.

However, the fragmented and opaque nature of the debt financing market prevents many businesses from accessing a solution that is suitable for them. From our work with UK SMEs and their advisors, there are two common themes that come out in conversations:

  • Large UK clearing banks are only lending very selectively and as a result it is difficult for SMEs to obtain debt financing; and,
  • All lenders look for the same things when assessing whether or not to lend to a business

These are both big misconceptions, as we will go on to explore in this brief article. While the lending environment has changed for SMEs, there are in fact more options available to SME borrowers than ever before. However, apart from all lenders wanting to be comfortable that they will get repaid, there aren’t many other similarities between the new generation of alternative lenders. 

The lending environment has changed

Traditionally, SMEs in the UK, who account for roughly 60% of private employment and around 50% of private sector turnover, had the vast majority of their borrowing requirements met by the traditional high street banks, and this model worked very well for a long period of time.

As the financial crisis of 2008 took hold, banks encountered severe issues with their balance sheets and their cash situations, which effectively halted the lending activity to SMEs. As time passed by, the banks’ balance sheets became healthier, but regulators put an increasing burden on banks in order to avoid another liquidity crisis in the future. As a heavier regulatory burden replaced the balance sheet issue for the banks, SMEs were no better off.

Today, the situation is somewhat different. A combination of the lack of lending from the high street banks, new technology, and support from regulators has enabled a range of alternative finance providers to enter the market for SME debt financing. These lenders include specialised asset based lenders, direct lending funds, hedge funds, institutional investors, challenger and foreign funded banks, and peer-to-peer platforms.

What all these new lenders have in common is the view that the high street banks have ‘dropped the ball’ and that there is an opportunity to lend to good creditworthy companies in the SME market. As a result, there are more options available to a potential borrower today than there were before the financial crisis.

Every lender is different

Another common misconception is that all lenders look for the same things. It is true that all lenders will want to be comfortable that they will get repaid, but the focus of each lender varies greatly. Some would want to be comfortable with the business idea and the people running the company, whilst other lenders would pay particular attention at the assets available for collateral or the distribution of customer orders over time.

As every lender has their own approach, it is important for borrowers to speak to the most appropriate lenders for their situation, with the right information and the right ‘ask’. By doing so borrowers will maximise their chances of obtaining appropriate financing in a timely manner. 

In summary

So, contrary to common misconceptions, there is ample lending capital available for quality SMEs. However, while the fragmentation of the SME credit markets presents far greater options and opportunities to UK SMEs than ever before, it also requires business owners to be far more knowledgeable of the lending landscape.

If you would like to discuss anything in this article or to talk about a particular situation, then please get in touch.


Dan Barrett, CreditSquare Ltd

db@creditsquare.co.uk   |  +44 (0) 203 289 2176   |   www.creditsquare.co.uk