The alternative financing option for SMEs

15 Oct 2018

An SME (small to medium sized enterprise) looking to expand its business 10 years ago would have visited the local bank branch to procure the necessary financing in what was usually a fairly routine and straightforward exercise. Fast forward to 2018 and that once dependable funding source isn’t what it used to be, as regulatory capital requirements put forward under Basel III make it all but impossible for banks to lend money to SMEs irrespective of their growth potential or promise.

“The cost to a bank of underwriting a loan for £100 million is roughly the same as lending out £1 million. Banks ultimately want to keep their shareholders happy and they are looking to deliver and maximise their return on equity (ROE) by focusing their lending to the larger corporate customers,” explains Ayan Mitra, CEO and founder at CODE Investing, one of the UK’s leading institutional debt finance platforms, speaking at a BNP Paribas Asset Management seminar on SME lending on September 20, 2018.

New entrants take ownership

These lethargic lending conditions are forcing SMEs to identify credible solutions to solve their existing funding shortages, conscious that a failure to do so will impede future growth and development. Non-banks have heard SMEs’ calls and are rallying around to fill the lending vacuum. Fund managers have been especially active launching private credit vehicles with lending facilities to diversify revenues away from flagship strategies.

The Alternative Credit Council (ACC), an industry group, says the private credit market has grown 14-fold since 2000 and presently looks after $600 billion in assets, although it is bullish that the sector could break through the $1 trillion barrier by 2020[1] .Digital solutions are also becoming more prominent with peer-2-peer (P2P) lenders and crowdfunding platforms increasingly dominating early stage equity fundraising.

Between 2012 and 2014, the amount of capital amassed through crowdfunding grew by 410%[2] while reports suggest that these platforms accounted for as many seed equity deals as the private equity industry[3]. Estimates suggest around £272 million was raised in 2016 through equity crowdfunding, while P2P loans totalled £1.23 billion[4]. Data from CODE Investing suggests digital, alternative financial platforms could encompass 9.1%, or £52.6 billion, of the total SME lending market in Europe by 2021, an increase from 2% in 2018[5].

 


[1] AIMA (October 4, 2017) ACC sees private credit market reaching $1 trillion by 2020

[2] Nesta (December 15, 2017) UK crowdfunding platform trends

[3] Financial Times (July 6, 2018) Red tape removal could boost public offerings and crowdfunding

[4] Finextra (December 11, 2017) UK alternative finance market is now worth £4.6 billion

[5] CODE Investing research

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