Alternative finance: the key to UK economic recovery?

Mark Byrne and James Crellin at Walker Morris discuss the role of alternative finance in the revival of the UK economy post-pandemic, as almost half of SMEs seek finance for growth over the next 12 months

The past 18 months have been difficult for businesses in all sectors, with widespread uncertainty, financial struggles and, for some, a complete halt to business operations. But, with the world slowly returning to normality, the UK economy is set to bounce back as research from leading law firm, Walker Morris, reveals that almost half (40%) of UK SMEs are seeking finance for growth.

SMEs account for up to 61% of total employment and around half of turnover within the UK private sector. Often referred to as the ‘lifeblood’ of economies around the world – SMEs are essential to the recovery of the UK economy following the impact of Covid-19.

According to the FSB, at the start of 2020 there were 5.94 million small businesses, with SMEs accounting for 99.9% of the business population. At the height of the pandemic the need for financial support for small businesses surged. This led to record lending to SMEs in 2020, rising to £54 billion in the first nine months of the year, as 1.5 million businesses drew on government-backed loans and schemes.

With many businesses now on an even keel and looking forward to the future, they now require additional finance to enable them to invest in growth strategies.

Yet, more than three quarters of businesses (77%) have been unable to secure traditional bank financing, making the need for alternative lenders greater than ever.

Traditional banks reluctant to lend

In the past decade, traditional banks have become less inclined to lend to SMEs. Some of this reluctance follows the longstanding repercussions of the 2008 Global Financial Crisis. As a result, we saw some of the biggest lenders limited access to funding in an attempt to reduce risk of liquidity.

Traditional banks also struggle with the cost and difficulty of getting up-to-date and complete information from SMEs. In addition, SMEs are often reluctant to take out products that require a lot of paperwork. Plus, some SMEs are unable to provide collateral for loans. However, SMEs now have alternative options when it comes to securing finance.

The rise of challenger banks

SMEs’ struggle to secure finance from traditional lenders created a gap in the banking space in which challenger banks, fintech companies and other alternative lenders are able to thrive.

The UK’s alternative lending market is one of the fastest growing sectors within finance. It is now worth a record £6.26 billion – with the European market doubling last year to over €6.6bn. This rapid growth demonstrates the scale of the opportunity for alternative lenders as economic recovery gets underway.

Many SMEs often need credit in order to finance their growth. More than half (51%) currently seeking funding will use it to grow through acquisitions, or to support investment in new technology. While 46% are looking to invest in real estate.

Proceeding with caution

Despite the huge growth within the alternative lending market and 40% of SMEs having plans to grow within the next 12 months, almost half of these (45%) are reluctant to proceed in securing funding from alternative lenders. Even though many are being refused lending from traditional banks.

Our recent study revealed the main barriers SMEs face when looking to use alternative lenders. Nearly half (45%) cited concerns over possible changes in market dynamics, which could impact lenders, and by extension, SMEs as customers.

In addition to this, SMEs showed apprehension over potential higher interest rates from alternative finance companies, making them appear less competitive against traditional lenders.

Well documented cases of lenders’ struggles, with lack of accreditation and associated risk, has led to an unfair perception of the industry, but this is not reflective of the reality of alternative finance.

There is more to be done to reassure SMEs that alternative finance is a viable option to support their business expansion goals. The substantial growth within the market means there is opportunity for SMEs to find lenders that cater to their specific business needs, with many offering innovative technological platforms, products and services tailored to various sectors.

Tips for securing funding through alternative lenders

With alternative finance leading the charge in SME growth, you can make sure you engage with the lender that is right for your business by following these tips:  

Seek legal counsel

Receiving good advice and seeking legal guidance is a good place to start. Good advice should help to ensure that any regulatory loopholes or concerns SMEs have around unregulated lending are addressed early and you are aware of the contractual obligations between both parties.

Look for lenders within your sector

It may help to look for alternative lenders that operate within your business specialism. This way they will have prior knowledge of your business sector and may be more willing to help financially, understanding the specific challenges of your industry.

Transparency

Be up front and honest about your business history, detailing any past debt, as well as your business’s strengths and previous achievements. Being transparent builds trust with potential investors and by ensuring they have as much information about your business’s future prospects as possible, they can make an informed decision on whether to offer the finance needed.

Plan and research

Be as prepared as possible when meeting with any potential lender. Knowing exactly how much you need to borrow and where within the business this money will go will give confidence to an investor and improve your chances of securing finance. As well as this, it is crucial for SMEs to have an open mind when looking for investment.

Do not let being rejected from mainstream banks put you off the search. There are a growing number of diverse alternative lenders – you just need to find the one that is right for your business.


Mark Byrne is a Partner at leading law firm Walker Morris and James Crellin is a Director in the Finance Group. Together they form part of the Alternative Lending Team. For more insights, read the full report by Walker Morris on alternative lending.

Main image courtesy of iStockPhoto.com

© Business Reporter 2021

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