Will the Covid-19 crisis come to be seen as prompting another step-change in the way small businesses borrow? Once upon a time, any small business in need of credit – for whatever purpose – automatically turned to its bank; in recent years, however, competition and innovation in the small and medium-sized enterprise (SME) finance market, as well as banks’ refusal to lend in the wake of the global financial crisis, have changed that. And the pandemic may accelerate this trend.
Last year was remarkable, of course. The £66bn of finance extended to SMEs via the Coronavirus Business Interruption Loan Scheme and the Bounce Back Loan Scheme eclipsed all other support. The scale and breadth of these Government-underwritten loan schemes saw lending of other types to SMEs, by both banks and alternative finance providers, fall back.
Overall, 45% of SMEs applied for external financial support last year, according to the British Business Bank, up from 13% in 2019. Gross bank lending to smaller businesses reached £104bn, an 82% increase. However, those figures include the advances made through the Government’s schemes. This low-cost Covid-19 support naturally dominated.
The question is what happens next. The British Business Bank points out that with the economy now moving into recovery mode – assuming vaccine programme setbacks are avoided – “there could be significant further demand for funding in 2021”. The crisis, after all, did not affect all businesses equally; in sectors that avoided the worst of the lockdown damage, many SMEs are now in a strong position to capitalise on economic growth. New businesses have also started up – the Federation of Small Businesses says there was a 12% increase in start-ups during 2020.
However, banks may not be ready to help. The banking sector has not yet seen a wave of bad debt, let alone been forced to take the axe to their balance sheets as we saw following the global financial crisis. But many banks will be nervous about what lies ahead – a third of small businesses expect to contract over the next 12 months according to the British Business Bank, which says may firms will struggle to repay what they have borrowed, both last year and prior to the crisis.
In which case, we may see banks move cautiously on applications for finance, even from resilient smaller businesses. And non-bank lenders and alternative finance providers may step into the breach once again, increasing their share of the SME lending market still further.
In this regard, it was fascinating to note this week’s results from MarketFinance, one of the best-known alternative finance providers in the UK. It has now moved into profit, reveals founder and CEO Anil Stocker, and has made a record start to 2021, providing £64m of funding through loans and invoice finance, up 50% on the same period of 2020.
Stocker believes the trend away from traditional bank finance is now set to accelerate once again. “The pandemic has sped up digital adoption across large parts of our society and business lending is no different,” he says. “We are seeing a continuing need to provide fast, easy-to-access, digitally available funding solutions to SMEs across all sectors within the UK. Fintech lenders such as MarketFinance are well placed to help power the post-Covid economic recovery.”
I’ve been a financial journalist for more than 20 years: I’ve written for most of the national newspapers in the UK (plus a host of magazines and web sites) on topics