The Borrowing Landscape

Are you looking for debt for a business?


by Adrian Howells

Borrowing money for entrepreneurial and growing businesses used to be a quite straightforward affair. You would pick up the phone to your local Relationship Manager (RM) at your bank and discuss your requirements. Local RMs had some authority, some autonomy; the influence to back your cause and (within reason) see that your borrowing request was successful.

If you wanted to shop around for the best deal, you’d just speak with the High Street lenders everybody has heard of and see what they had on offer. It was so simple.

The Financial Crash changed all that. The “Big Four” banks became much more cautious and introduced detailed criteria and additional approval layers to add controls to their lending, but this caused them to largely absent themselves from the mainstream small and medium-sized enterprises (SME) lending market, in particular at the smaller end.  Decisions were increasingly centralised, your RM lost a good deal of their influence (much to their frustration!).  If you wanted to borrow less than a couple of £ million, it was challenging.

All was not lost, however. In the place of the “Big Four” came many “Challenger” banks. The likes of Clydesdale, Santander, AIB, Metro and OakNorth picked up much of the slack whilst the larger banks focussed on the upper end of the SME market and bigger deals overall. Equally, if you were looking to finance a transaction there were other deal-specific lenders entering the market too. 

What drove this? Well for a start, larger deals are deemed to be inherently safer. If a company is sizable enough to support borrowing a large amount of money, then it is more likely to have greater capacity to withstand a storm in the wider economy, or at least have the systems to forewarn it. That said, it certainly does not follow that large companies are immune to failure and greater losses for banks – as has been repeatedly demonstrated in the news for the last few years.  

In addition, banks sought a level of efficiency. Writing a cheque for £2 million will often go through the same rigour and review as writing one for £20 million. With thin margins in the banking sector and increased competition, lending focus naturally shifted away from SME businesses.

The “Challenger” banks have served the SME market well since the crash. Demand was there, capital was there, there was money to be made all round. Even since the 2016 Brexit vote, lending has continued in much the same way as since the crash. Those of us working with SME businesses to find the best deal still had a variety of lenders to speak to.

Recent months have however seen a tightening in the lending market with some lenders’ appetite noticeably reduced. Such moves do not come with official announcements, but are noted through discussions on behalf of clients with lenders, with our peers in Private Equity, with other advisers and, perhaps most significantly, through a demonstrable application of more restrictive lending criteria, either reducing borrowing quantum or increasing borrowing costs outside recent norms.

It is tricky not to link this to uncertainty around Brexit and what the UK economy will look like afterwards. If this is the case however, it is really the first such sign of any significant Brexit-related impact on the SME borrowing market as more widely, deals in the SME space have continued as before. Business leaders are still ambitious and looking to grow their companies, and ultimately owner managers still look to retire or have the same decisions, often driven by life events that they need to work through: life goes on.  

So, what of the present lending market then? Are there still options available to SMEs looking for debt? In short, yes, but you need to know where to look. Despite retrenchment from some traditional sources of debt, there are more lending options coming to the market than ever before, albeit with different criteria and approaches than banks.  

This new wave of lenders starting to dominate the market are Debt Funds. These funds exist simply to deploy capital; there are no deposit worries as with a more traditional bank. Funds typically charge a little more than traditional banks, but they are much more pragmatic and flexible in what they can do. They have the same requirement for a return and capital repayment over time, but, because they have agreed their risk profile with their own investors, they can offer a greater variety of options.  Some will lend under £1 million; most are looking to lend sub-£5 million; others are keen to operate in the larger markets too, and are increasingly the more likely funders of deals now than the mainstream banks.

Debt is available for acquisition, it is available for working capital, it is available for growth and development, it is available for succession planning, through management buyouts; management buy-ins; and even “cash-out” deals. Regardless of your needs, if you are seeking debt for a transitional or transactional event in a profitable business, we will be able to help point you in the right direction.