Alternative lenders and private debt funds fill SME funding gap
Alternative lenders and private debt funds have filled the gap left in the UK small business finance market after banks scaled back their lending, according to the British Business Bank.
The state development bank’s small business finance markets 2023/24 report noted that alternative finance providers “are now very much part of the mainstream for many smaller businesses looking to borrow and are able to reach many parts of the market more traditional lenders cannot or do not wish to reach”.
It said that non-bank lenders had grown their presence in the asset finance and invoice and asset-based lending markets, by targeting under-served sectors of the market such as specialist equipment asset finance, or by offering a different customer proposition such as streamlined applications and more flexible approaches.
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It also highlighted the growth of private debt funds, saying that they are “often the most viable funding solution for smaller businesses and mid-market firms who require flexibility in their financing structure.”
However, the British Business Bank cited challenges among both types of finance providers.
Looking at private debt, it said that there has been “a significant slowdown in mid-market deals” since 2021 that had continued into 2023. It analysed the UK private debt market using Preqin and Deloitte data, combined with its own data from its small-cap private debt portfolio.
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Its analysis found that that has been a continuation of the slowdown in mid-market dealmaking in the UK private debt sector.
“During 2023 there was a steady increase in central bank interest rates in the UK and other developed economies to control inflation,” the report said. “This increase in the cost of borrowing, combined with weaker business growth, has reduced demand for debt financing.
“These shifts in economic conditions have also made private debt funds more selective when considering new investments.”
Meanwhile, 2023 was “a mixed picture” for alternative lenders, the report said.
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Only half the lenders that the British Business Bank tracks had published 2023 lending volumes at the time of the report’s publication, but of those who had, a third saw volumes grow compared to 2022 while the other two thirds saw them shrink.
Despite this, aggregate origination for those who had published was up by around 15 per cent for both business and property lending.
Non-bank and fintech lenders faced challenging funding conditions last year, the Bank said, as the higher interest rate environment impacted them more than banks. Banks typically have access to deposits, which are cheaper than wholesale funding.
The report showed that bank lending to smaller businesses fell by nine per cent year-on-year to £59.2bn in 2023.
And for the third consecutive year, challenger and specialist banks account for a higher share (59 per cent) of total gross lending than the big five banks (41 per cent).
“This year’s report sees a continuing increase in businesses seeking alternative finance options, evidenced by further growth from challenger and specialist banks, and asset finance providers,” said Louis Taylor, chief executive of the British Business Bank.
“This is indicative of a persisting trend of finance markets offering a wider range of finance to smaller businesses with diverse finance needs.”