If the banks won’t back our SMEs, where can they find lending support?

The UK’s economic backdrop has been far from ideal for the nation’s SMEs in recent years, with the Covid pandemic, Brexit implications and the cost of living crisis wreaking havoc with the economy. But to add to their burdens, the waters surrounding lending rules for SMEs could soon be much murkier.

After the 2008 financial crash, Basel III rules were updated to strengthen regulations around bank capital to ensure banks improved their risk management. But to ensure smaller businesses didn’t suffer, the SME Supporting Factor was introduced, enabling banks to relax bank capital rules when lending to smaller businesses.

Earlier this year, reports suggested that the UK’s banking watchdog, the Prudential Regulation Authority (PRA), was considering removing the Supporting Factor, a move that would almost certainly curtail lending to small businesses and leave many in the lurch during a time of economic difficulty. The absence of the SME Supporting Factor could mean traditional bank loans become harder to come by for smaller businesses, and those who manage to secure them will be stung by higher costs. Commercial brokers may also struggle to know where they stand if the SME Supporting Factor is removed.

Research from Oxera on behalf of Allica Bank found the move could result in a shortfall in SME lending of up to £44 billion. This will be particularly winding for SMEs in need of funding support; 43% of the 300 SMEs surveyed for Growth Lending’s Don’t Bank On It report described their need for investment as “significant”.

A loan can be used as a tool to fuel business growth, whether a business’ ambition is to grow its team, introduce new product lines or expand into new territories. And while there is a chance banks will be less of an option for many SMEs in the future, there are still swathes of lending opportunities out there – SMEs just need to be guided by fully-informed financial experts.

For any commercial broker dealing with a small business that requires lending support, the key is to know that lending support exists beyond the banks, whether the SME Supporting Factor is removed or not.

Alternative lending options include, and are by no means limited to, invoice financing and revenue-based finance. For the former, businesses can unlock capital that is tied up in owed payments, while the latter is a growth debt option in which lending is linked to the business’ regular recurring revenue. There are a range of dynamic alternative finance products out there which can be tailored to suit businesses and their individual needs.

No firm decisions appear to have been made yet on the SME Supporting Factor, but it is crucially important to highlight that SMEs are not restricted to solely bank lending in either case. Non-traditional lenders are equipped with funding capability and a wealth of unmatched knowledge about the SME space, and brokers can play an integral role in signposting SMEs to the right support.