Expert opinion
Are Banks the ‘Heroes or Villains’ in Funding UK SMEs? In the first of a two part article, Alexei Garan, Head of Business Funding at Shaw & Co, ponders who are the heroes and villains in the UK funding landscape – banks or alternative lenders? Here, Alexei considers the role of banks.
Most things written about the current funding landscape for SMEs focus the high street banks’ failure to provide credit “as they used to”. Much noise is made about how the “banks must lend to support SMEs” but, from our active daily engagement in funding SMEs for longer than most of us care to admit, we have a somewhat different perspective.
"Banks have now lost their status as a one-stop-shop for SME lending."
First, some background. The disruptive force of the internet travelled through all major industries from the mid-to-late 1990’s. The erosion of banks’ stronghold on SME lending was already well underway by the time Lehman collapsed. For example, FX migrated to brokers and invoice discounting to more nimble “alternative” lenders. Banks were increasingly being backed into low value commodity business where FinTech entrants were readying to take them on.
Accelerated by the Great Financial Crisis (GFC) of 2008, banks have now lost their status as a one-stop-shop for SME lending. Disruption in the market place has forced the major banks to change to survive. As a consequence of these changes, many SMEs have lost their principal source of advice when it comes to funding, a trusted Relationship Manager at the local branch. Of course, some of the questionable practices of the banks during and after the GFC have eroded trust between the bank and the SME rendering that sort of “old school” relationship more than challenging, but a balanced view concludes banks were singled out for a lot of flack attributable to Governments, regulators and indeed some borrowers.
Since 2008, low interest rates, higher regulatory costs and expensive scandals like PPI, have added to banks woes and the trickle of competition became a flood as increasing number of alternative asset finance and cashflow lending specialists set up to take banks’ market share as banks found themselves fighting with one arm tied behind their backs.
In the current market, Banks have managed to cling on to 3 major strengths:
In advising SMEs with any kind of a funding requirement, be it working capital, growth funding, MBO/acquisition funding or indeed emergency Covid-19 funding, our first check is whether bank funding is feasible and how much of it could be relied on. Whilst banks can’t compete on leverage, speed of execution, flexibility and many other aspects, the low cost of a bank loan can still form a useful part of an overall funding package for a growing business or a transaction.
It is the utility-like credit space that banks now unapologetically occupy. And it would serve the SME community not to expect highly leveraged, risky or innovative propositions to be funded by their high street banks. Frankly, given where the vast majority of us still keep our personal and corporate deposit accounts, it is not a bad thing.
For those SME owners or finance directors still wistfully missing the “good old days”, I’d say we all learned to shop around for insurance, utilities and any other such services, so it is not that much of a stretch to seek funding on the same basis. After all, your needs today may differ radically from your needs tomorrow, as should the solutions.
Luckily, firms like Shaw & Co have well established funding advisory practices. These are composed of highly experienced ex-bank personnel that not only understand the value of maintaining long-standing relationship with SME clients, but also how to best fund those clients’ requirements in today’s market. We see this market catering for all SME funding requirements, but the specific solution may be best sought from traditional or, increasingly, alternative players.
And it is to the latter that I will shortly follow up with Part II of my blog where I reflect on the role of alternative lenders in the UK funding landscape.
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