This week we look at small or medium-sized enterprise (SME) lending and how you and Brickowner can support them by providing investment for their projects and growth.
What is an SME?
Typically, the definition of an SME is a business with less than 250 employees and a turnover of less than £40 million. SMEs supply around 99% of businesses operating in the UK and are therefore immensely important to the UK economy. Millions of people work for SMEs and as a result, they are vital for the growth and sustainability of the economy.
SMEs and Lending
Although they are a vital part of the financial ecosystem, these businesses face extreme difficulties in borrowing capital. SMEs are often associated with higher risks, increased transaction costs and a lack of collateral—about 50% of small business loans get rejected. In recent years the value of issued bank loans to SME’s in the UK fell to £55.6 million in Q4 of 2018, a 78% drop from its maximum of £255 million in 2009.
This trend is a hangover of the 2007 financial crisis when big high street banks needed to shore up their capital and had to block-off some of their lending pipes. They needed to reduce their risk levels. This combined with regulatory changes, balance sheet restrictions such as Basel III, and the introduction of the slotting regime has caused the likes of Nationwide and the Co-op Bank to withdraw from this market altogether.
Unfortunately, it was difficult for alternative lenders to fill the void: the banks had a significant advantage in the SME lending market. The data banks held on their customers’ financials enable better credit risk modelling than the competition, who are reliant on filings at Companies House and bank statement printouts.
As a result, deciding whether to approve an SME loan was a job for a bank manager. They would meet the owners and review the business plans. This was a considerable time and labour-intensive process that made borrowing expensive for SME’s.
Finding a Solution
For SMEs to reach their full potential and have access to the capital required to invest in their growth, they now need to look beyond mainstream lenders and consider the full range of alternative finance options available to them.
Open banking regulations introduced by the Competition and Markets Authority in the last two years make banks to their data with any third party authorised by an account holder. The implication being, non-bank lenders will be able to combine their own data sets with those held by the bank. Not only will this help lenders decide if a business is credit worthy, but it will also help lenders monitor the ongoing affordability of repayments through the life of the loan, meaning the lender can step-in before problems become too serious.
2020 could bring about remarkable changes in SME lending. The transfer of data control from institutions to SMEs will mean more lenders, better credit decisions, and fewer bad loans. This leaves nimble fintech startups like Brickowner to fill the holes left in the credit market where banks are no longer active.
Brickowner believes the regional UK market offers a compelling opportunity to deliver strong risk-adjusted returns via loans to SMEs. By securing the loans against real estate assets owned by SMEs, they could considerably reduce the risk of exposure to investors.
Over 2020 Brickowner is looking to capitalise on this by creating new products for users to invest in SME property-backed funds via the activities of Brickowner Investments Limited, with the added flexibility of being able to invest smaller sums than previously possible. As ever, investors should bear in mind the key risks of taking part in this type of investment.
Lending Times – Current state of SME lending
Tunstall Real Estate TREC II Overview November 2019