Our latest research shows that the outstanding value of non-emergency lending by banks to SMEs has dropped by 10% in a year. With traditional lenders having to prioritise the demand for CBILS and BBLS loans, SMEs are struggling to obtain finance that is not underwritten by the Government. So, what are the implications for SMEs looking for funding to grow, and what alternatives to traditional lenders are open to them?
SME levels of borrowing from banks and other traditional lenders were relatively stable from 2012 until the early part of 2020. However, since the outset of the pandemic, the volume of 'normal’ bank lending to businesses has reduced and the outstanding value of non-emergency lending from banks to SMEs has fallen by 10% from £168bn in December 2019 to £152bn in December 2020*.
As CBILS and BBLS loans are underwritten by the Government, banks have been able to offer better terms for these loans than for ‘business as usual’ lends, which do not provide lenders with the same safety net. Nearly £61bn had been handed out in CBILS and BBLS loans to SMEs up to December 2020.
But as the CBILS and BBLS schemes are due to come to an end in the next couple of months, traditional lenders are likely to have limited appetite and capacity to increase their exposure to the SME sector any further, given the amount by which overall SME lending levels have increased over historical levels. CBILS and BBLS loans have dominated lenders activities and taken up huge amounts of resource. Many banks have therefore already cut back on non-emergency lending to new to bank customers, which has big implications for businesses looking for funding to grow. Many businesses may thus struggle to obtain the funds they need from traditional lenders in the upcoming months.
Additionally, with record levels of overall borrowing, many SMEs will need to consider how they can meet upcoming debt repayments. As CBILS and BBLS loans will need to service both interest and principal payments after the first 12 months, payments for those that took out a loan when both schemes launched in April 2020 are due to commence in the next few months. However, the new “pay-as-you-grow” initiative announced by the Chancellor, which will allow businesses to extend the length of the emergency loans from six to ten years and allow the temporary deferral of interest and principal repayments should help.
Another consideration is that, since a portion of CBILS lenders have required a ‘first charge’, meaning that they rank ahead of other debt, it may be difficult for SMEs to raise additional debt to fund their business aspirations without repaying the CBILS loan.
There are alternative options open to businesses looking to fund acquisition opportunities and/or the increased working capital requirements that typically accompanies organic growth. These options include seeking asset-based lending or funding from alternative lenders.
Alternative lenders remain open for business and many are keen to deploy capital to well-managed SMEs that have strong growth potential. Although alternative lenders are now being more selective and cautious as they wait to see how the economy recovers from the pandemic, the majority are keen to support strong management teams and business models.
Debt advisers can be crucial in helping a business to secure the right funding package specific for a business’ needs and objectives. Advisers can help a business explore the various funding options open to them, including from alternative finance providers, along with presenting the business to a lender in the best way possible and guiding the company through the negotiation and legal stage of taking on new funding.
The ACP team has both restructuring experience and individuals with experience of lending within banks and alternative finance providers. Having the right expertise can go a long way to ensuring a business obtains the best deal possible, 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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*Based on data from the Bank of England and the British Business Bank. SMEs are defined as businesses with less than £25m turnover.