As banks retreat, non-bank lenders can help fund SME growth

By Sean Brophy, below, Head of Direct Lending, Triple Point

The fallout from the war in Ukraine, in combination with global economic volatility has led to increasingly expensive operational costs for SMEs. Energy and material prices have increased drastically, making external funding a necessary requirement for SMEs to grow and develop. However, potential new Bank of England rules are further undermining the attractiveness of SME lending for banks. As a result, traditional funding is becoming scarce, and SMEs are increasingly turning to non-bank lenders as alternative finance sources.

Rising interest rates an issue

Non-bank lenders not only offer a viable alternative to traditional sources of funding, but they also provide tailored, secure loans that are particularly suited to the needs of smaller businesses. In a time of uncertainty, transparent and reliable capital is crucial for SMEs to grow and develop. With surging interest rates, SMEs are finding it increasingly challenging to secure finance. To illustrate, the average rate on new bank loans has increased fivefold from just 0.98% in May 2020 to 5.84% in December 2022.

Fluctuations in interest rates are also making it increasingly difficult to plan ahead for business leaders, as sudden rate rises can impact pre-existing flexible rate loans. Non-bank lenders such as Triple Point can play a crucial role in this environment, providing fixed-rate loans tailored to individual SMEs’ needs. This affords financial security to smaller businesses during these uncertain economic times, enabling them to continue growing, even in a high-interest-rate environment.

New bank capital rules on the horizon

Traditional lenders are no longer reliable sources of funding for SMEs. Last year, nearly a third of SMEs felt that ongoing challenges in securing lending had led to an investment gap in the UK compared to European competitors. New capital rules planned by the Bank of England will make it more expensive for banks to lend to SMEs, further reducing the likelihood of swift and reliable funding. One estimate by consultancy firm Oxera predicts that the new rules could reduce small business lending from banks by up to £44 billion.

Many of those SMEs searching for funding are recently formed, with over half a million small businesses being created annually in recent years. These SMEs require sophisticated funding between £500,000 and £5 million to fund growth, acquire stock, or finance changes of ownership, such as MBOs. However, many of these growing and newly established businesses are faced with limited options.

This is where private lenders can plug the gap left by traditional banks. Non-bank lenders attract new funders into the market, including pension funds, endowments, and large asset managers. This diversity of funding sources gives SMEs more choices when assessing their funding options from non-bank lenders. Additionally, loan decisions are often quicker than with traditional banks, with credit decisions returned in a matter of hours or days. This quick response time is vital for SMEs under financial pressure.

Supporting SMEs is crucial – non-bank lenders can help

SMEs are the lifeblood of the UK economy, providing the dynamism and energy that powers business innovation. Funding their strategies and growth plans is critical to the growth of the economy as a whole. This is why SMEs need to have access to transparent and reliable capital to grow and thrive, and non-bank lenders are increasingly becoming a necessary alternative source of funding.

The current economic climate has made it increasingly difficult for SMEs to secure traditional bank loans, and rising interest rates only add to the challenges they face. However, non-bank lenders such as Triple Point Private Credit can offer bespoke lending solutions that support the growth and development of smaller businesses. With their expertise and capacity to deliver tailored deals, non-bank lenders are well-positioned to help SMEs overcome funding challenges and achieve their growth plans.