90% of all current SME lending is emergency funding – but is it always the right financing solution?


Analysis that we’ve done here at Altenburg Advisory shows that around 90% of all lending to UK SMEs in April and May has been extended using CBILS or BBLS (Bounce Back Loan Scheme)*, the Government-backed lending schemes for businesses hit by the lockdown.

There are now over 100 lenders providing this emergency funding and helping struggling businesses. However, for those businesses on a growth trajectory who want to retain flexibility over how they grow and finance their business, there are good reasons why you would want to look further than emergency loans.

While more traditional lenders are focussing on providing government backed funding, there are a wide range of alternative funders providing funding to good quality UK businesses.

These alternative lenders should be able to lend with fewer restrictions on how the loans can be used, allowing the business to pursue M&A, finance organic growth and fund shareholding reorganisations. As an example, CBILS funding cannot be used by those looking to fund Management Buy Ins (MBIs).

The majority of CBILS lenders will require a first charge (i.e. their debt ranks ahead of any other existing debt, and would be repaid first should the business default). This can be problematic where an existing lender does not want to allow another lender to take a first charge. An alternative funder could refinance the existing funding and provide additional headroom.

In the future and without Government guarantees, there is no certainty that a CBILS lender will be willing or able to provide additional finance to help the borrower fund additional investment or acquisitions. This compares to facilities that can be arranged with alternative lenders that provide hard and/or soft commitments to provide future funding when required.

For ambitious businesses, the economic disruption caused by the lockdown will create plenty of opportunities to buy assets or entire businesses very cheaply – if that business can move quickly. For an expansion minded business, the opportunity cost of not being able to take advantage of growth opportunities is likely to be far greater than the saving from 12 months of paying zero interest on a CBILS loan.

That only 10% of SME lending is currently non-CBILS/BBLS funding is an indicator of the difficulty of finding such flexible funding from traditional lenders. Mainstream lenders are currently being swamped with applications. According to UK Finance, banks have had to deal with 14 times their usual number of business loan/overdraft applications. That gives them almost no time to consider bespoke lending requests from SMEs. Alternative lenders do not have this problem and pride themselves on quick decision making and efficient processes.

There is an awful lot to applaud about the CBILS scheme. It is a brave initiative by the Government and is going to keep alive a lot of businesses and jobs that would have been lost. However, for those businesses, whose business plans for the next few years is aimed at growth rather than just survival, more flexible and appropriate finance is available and can be arranged.

Outside of the traditional banks the lending market remains very fragmented, which is also making it hard for SMEs to navigate the market and find the most appropriate funders for their business without external advice.

In our next blog we’ll look at how a debt advisory firm such as ourselves can help businesses get the most appropriate funding; how to ensure your application is thought through properly and why knowing the right person at the right lender can be so important.

Altenburg Advisory is a debt advisory focussed corporate finance firm, which works with established UK businesses seeking debt funding and broader independent corporate finance support. Want to learn more? Please get in touch at info@altenburgadvisory.com.

*Based on data from the Bank of England and the British Business Bank.


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