A broker’s view of the SME debt market – tricky times ahead…..?

Alistair Aird, Appointed Representative, Funding Friends

With a recession forecast, cost pressures increasing, energy and fuel reaching stratospheric highs, structural skills shortages evident and interest rates rising businesses need to be well prepared for the next 12 months.

The mantra of “turnover is vanity, profit is sanity, but cash is king” is truer today than ever, and access to funding when needed will be the single most protection against the economic turbulence ahead.

Following the significant growth in lending volumes in 2020/21 from the government’s Covid-19 lending schemes, demand for finance has been comparatively muted over the past year, with Q1 2022 the lowest Q1 demand in three years.

Much of the Covid lending was in the form of term loans, which, whilst very welcome at the time, can now be a burden on cashflow for many small businesses and may need restructuring. The debt got the business through to now – however the “now” turned out to be not a particularly great time either!

From what Funding Friends are seeing in the current marketplace, banks are being ever more cautious in their lending, which is a particular challenge if a business has been operating in the past 24 months.

We are now seeing a novel approach to the “we’re not lending” typical of the 2008 recession – the modern way of not lending is to slow down service standards to a dribble with a mantra of “we are experiencing unprecedented demand and therefore our service standard is 15 days to respond to your email”. Fortunately, this time round there are a lot more lenders and some 50%+ of the SME lending market is outside the main banks. There are still plenty of other funders out there keen to lend all of whom have particular niches, and thus more likely to get to a positive response.

Some players will look less at the security in the business and more towards Personal Guarantees, which whilst not for everyone, can be a solution when the current business does not have the asset security other funders look for. We’ve worked with a lot of clients to negotiate suitable levels of PG or remove them entirely.

In the property world, lending appetite remains strong across the board, however if a firm has had a credit blip over the last three years, or even be deemed to not have traded particularly strongly then raising finance can become tricky. We looked at a case for a client lately who had difficulties in covid and out of 11 lenders approached only two were able to offer terms that would get a deal done.

Fixed rate borrowing is rising in popularity and more providers are now offering 2-5 year fixed rates. With regard to variable rates, back in the days when base was 5% funders used to price at say 1% over base. These days rates over base can be as much as 6%, with the added bear trap of minimum terms on deals. Breaking a minimum term to move to another lender for a better deal can result in costly early repayment charges.

In summary, appetite is reduced, time to complete deals is increased and the “deal” can be a thorny rose indeed. For every business looking to raise funding using a good broker will save time, effort and generate a better result. The broker will be able to approach the correct funders for the deal faster and understand where the best terms can be obtained for the client. Developing a relationship with this broker as a longer-term ally for the times ahead is a very sensible step – they should be a key component of the professional team around the business.
If you are looking for funding or have clients that are looking for finance, from property to cashflow and acquisition, we can help.