Why alternative lending will be essential to save UK SMEs

As disruption from coronavirus (COVID-19) ripples through all levels of society, the UK’s small and medium-sized enterprises (SMEs) are bearing the majority of the financial burden. In a situation where a fifth of small businesses could be at risk of collapsing within a month, the ability of small businesses to access external finance has never been more important.

While the government has taken steps to open up access to capital for SMEs, offering government-backed emergency loans of up to £5m to keep them solvent, there are signs that traditional lenders are falling short.

The strict conditions, high interest rates and long wait times reported bring to mind the performance of banks during the 2008 financial crisis. The experience of SMEs during that recession led to a concerted effort to expand the variety of external financing options available, creating what we now know as “alternative finance”.

This makes it the ideal tool to help SMEs through COVID-19

In this new crisis, alternative lending has a chance to come into its own as a recourse for the nation’s struggling business.

The state of lending

The government’s primary tool to stimulate access to capital is the Coronavirus Business Interruption Loan Scheme (CBILS), delivered through the British Business Bank. This scheme provides access to interest-free loan, overdrafts, invoice finance and asset finance to help businesses through COVID-19-related difficulties.

While this scheme was initially welcomed by the business community, many have since been refused emergency loans due to their financial performance, with others being turned down for having money in the bank. In fact, fewer than 1,000 emergency loans have been approved so far out of 130,000 enquiries, as of 3 April, according to UK Finance.

There have also been reports of banks asking for steep personal guarantees to issue emergency loans, forcing applicants to risk their personal assets and bear interest rates of 7% and 12% for loans where the bank is taking on minimal risk.

The evidence so far suggests that traditional loan processes are not able to keep up the experience SMEs are looking for. While the government is updating its advice, there is a huge opportunity for alternative lenders to fill the gap and support the nation’s businesses.

The power of alternative lending

Alternative lending is a broad term that describes the wide range of loan options available to consumers and business owners outside of a traditional bank loan. These include services such as asset finance, private equity, peer-to-peer lending and invoice finance.

While these were traditionally used when a business could not secure a business loan, they have now become attractive options due their convenience and flexibility. Alternative financing models have grown significantly in popularity since 2008. Asset finance is the most popular method of external funding after traditional business loans, accounting for £18.6 billion worth of SME lending in 2017.

Why now is the time for asset finance

Asset finance provides access to assets such as equipment, machinery and vehicles, or enables businesses to release cash from the value of assets already owned. This makes it the ideal tool to help SMEs through COVID-19.

Many small businesses are having to undergo a significant shift in operations. Shops are moving sales online and restaurants are becoming delivery services, both of which require new equipment and investment. Meanwhile, other businesses are stuck with fixed assets that can’t deliver value such as retail premises and unused equipment, while incurring costs such as rent or wages.

Asset financing can increase access to essential equipment quickly, without the need for capital upfront, and unlock the value in stagnant assets, all without endangering the personal assets of business owners.

This explains why several finance providers have already expanded their asset financing services or created one from scratch.

Creating a customer-focused service

The key to helping businesses through this period is speed and access. As applications from SMEs skyrocket, traditional lenders are warning that they could take more than a month to process. Others are only taking applications only from existing customers owing to high demand.

In order to provide a superior service, alternative lenders must prioritise simple applications, open information and fast decisions. Technology will play a key role in achieving this.

Modern asset finance broker tools will be essential for reducing manual processes, managing customer risk and closing deals digitally – the “virtual handshake” that businesses will need to feel secure.

There are encouraging signs that brokers are taking this need seriously, with some lenders now offering decisions in three days. To make a real difference, this technology driven approach will have to be scaled across the whole industry.

Putting businesses first

In a time where SMEs everywhere are struggling, it’s essential to maximise the options available for financial support to ensure that as many as possible can benefit from fast, efficient access to capital.

Banks will play an important role in supporting SMEs, but if we are truly to be ‘in it together’ then that must also include widening the array of alternative lending tools to benefit the widest audience of entrepreneurs.

If asset finance brokers can leverage the right technology, this could be a chance to transform the lending industry while guaranteeing the future of the UK economy.