Non-Bank lenders: Filling the gap in SME funding
By Sean Brophy, Head of Direct Lending at Triple Point
In a challenging economic climate, SMEs and start-ups are turning to non-bank lenders for secure and tailored funding solutions to support their growth and development, writes Triple Point’s Sean Brophy.
In the face of soaring operational costs for small and medium-sized businesses (SMEs) caused by the fallout from the war in Ukraine and global economic volatility, the need for external funding has become indispensable for their growth and development. However, the attractiveness of SME lending for banks is being further eroded by potential new Bank of England regulations. Consequently, traditional funding sources are drying up, prompting SMEs to increasingly turn to non-bank lenders as alternative finance providers.
Challenges posed by high interest rates
Non-bank lenders not only present a viable alternative to conventional funding sources but also offer tailor-made and secure loans that cater specifically to the needs of smaller businesses. In times of uncertainty, SMEs require transparent and reliable capital to continue their growth trajectory. However, with the surge in interest rates, SMEs are encountering mounting difficulties in securing financial support. For instance, the average interest rate on new bank loans has skyrocketed from a mere 0.98% in May 2020 to 5.84% in December 2022—a fivefold increase.
Fluctuations in interest rates further impact the forward planning for businesses, as sudden rate hikes can impact existing loans with flexible interest rates. In a challenging environment, non-bank lenders like Triple Point play a crucial role by offering fixed-rate loans tailored to the specific needs of individual SMEs. This provides financial stability to smaller businesses during uncertain economic times, enabling them to continue growing even when faced with high or changeable interest rates.
Impending bank capital regulations
Traditional lenders can no longer be relied upon as stable funding sources for SMEs. Last year, nearly one-third of SMEs expressed that ongoing difficulties in obtaining loans have created an investment gap between the UK and its European counterparts. Proposed capital rules planned by the Bank of England will impose higher costs on banks for lending to SMEs, further reducing the likelihood of swift and dependable funding from traditional lenders. In fact, consulting firm Oxera predicts that these new rules could shrink bank lending to small businesses by up to £44 billion.
Many of the SMEs seeking funding are start-ups, with over half a million small businesses being formed annually in recent years. These new businesses require sophisticated funding ranging from £500,000 to £5 million to aid growth, inventory acquisition, or financing ownership changes such as management buyouts (MBOs). However, these growing and emerging businesses are faced with limited options.
This is where private lenders can fill the void left by traditional banks. Non-bank lenders attract new investors into the market, including pension funds, endowments, and asset managers. This diversity of funding sources provides SMEs with greater flexibility when evaluating their financing alternatives from non-bank lenders. Additionally, loan decisions are often expedited compared to traditional banks, with credit assessments returned within hours or days. This rapid response time is vital for SMEs operating under financial pressure.
A crucial support for start-ups and SMEs
Non-bank lenders are uniquely positioned to provide valuable support to start-ups in particular. These newly established businesses often face significant hurdles when trying to secure funding from traditional banks, as they may lack extensive financial track records or tangible assets for collateral. Non-bank lenders, on the other hand, are often more open to considering the potential of a start-up, taking into account factors such as the business model, growth prospects, and the entrepreneur’s vision.
By offering flexible and tailored financing solutions, non-bank lenders can bridge the funding gap for startups and SMEs, enabling them to access the capital they need to launch, expand, and bring innovative ideas to market. This support is crucial for fostering entrepreneurship and driving economic growth by nurturing the next generation of successful businesses.
The current economic climate has made it increasingly challenging for SMEs to secure conventional bank loans, and rising interest rates only exacerbate the obstacles they face. However, non-bank lenders like Triple Point Private Credit can provide tailored lending solutions that support the growth and development of smaller businesses. Equipped with their expertise and capacity to deliver personalised deals, non-bank lenders are well-positioned to help SMEs overcome funding challenges and achieve their growth aspirations.