Four new banks were launched in the UK in the first ten months of the coronavirus crisis, adding to the 41 launched over the previous seven years, in a further sign of the growing options available to businesses looking for finance as CBILS comes to an end.

The high street banks are likely to reduce their credit appetite for lending to SMEs in the coming months whilst the dust settles on the vast of money they have lent under the BBLS and CBILS schemes. This means many businesses may now need to look elsewhere for the funding they need to grow in 2021 and beyond.

Including the four new banks launched in the last year, there have been 23 new UK banks to launch since 2013, alongside 22 banks to launch in the UK either as a branch or subsidiary of an overseas bank in that same period. These figures do not even include the larger challenger banks that have launched since the credit crunch such as Shawbrook, Metro Bank and Aldermore.

The figures highlight the increasing competition challenger banks are providing to high street banks in providing lending to small and medium sized businesses

In addition to challenger banks, there are now hundreds of debt funds looking to provide funding to growing UK SMEs. This means the funding options for UK businesses outside of the high street banks have never been greater.

The three most common types of lending are asset backed lending (ABL), real estate and cash flow. While the number of lenders and range of debt products has increased across all three types, cash flow lending has seen the biggest increase in the number of lenders and products over the past decade.

To try and illustrate the range of cash flow lending debt products available to borrowers, the graph below shows ACP Altenburg Advisory’s summary view of the cash flow lending market in the UK lower mid market (Debt size up to c.£75m).

The chart shows the types of cash flow products (in the green bubbles) and the types of lenders (along the bottom of the chart). The x axis shows an increasing level of credit risk and the y axis shows an increasing level of the cost of the funding. Fairly intuitively, as the risk increases so too does the cost of the borrowing.

While the cost of borrowing is largely a function of the level of risk that a lender is being asked to take, it is also partly related to the level of flexibility a borrower requires. Borrowers that secure a funding package with greater amounts of flexibility, e.g. a debt solution tailored to the business, ample covenant headroom, lower levels of (or even zero) amortisation and/or certainty of follow on funding etc, are likely to pay a higher price for the funding.

Unitranche funding solutions (a hybrid debt facility that combines senior debt and subordinated/ mezzanine debt into a single facility) come with a greater degree of flexibility than more traditional debt packages (term loans, overdrafts, RCFs etc), hence the higher cost of lending.

There is a shortage of lenders providing capital at a cost of around 4-6%. The more traditional banks, who tend to be more conservative with their lending appetite, tend to lend below 4/5% and the alternative banks and funds need who have raised money with a certain return hurdle tend to lend with costs above 6%.

With more funding options available to businesses now than ever before, directors and owner-managers unsure of how to proceed should seek advice now. Working with a debt advisory firm can be critical to ensure that your business secures the most appropriate funding deal, both for the present and the future.

ACP Altenburg Advisory is part of ACP, a leading independent debt advisory association for SME and mid-market companies, advising clients on the options available to them and providing hands on support from day one all the way through to drawdown.

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