Once, SME owners could go to their local high street bank when looking for finance to take their business further. In the last 10 years, however, larger retail banks have withdrawn from the market, allowing a proliferation of independent lenders eager to fill the gap. Christopher Marchant spoke to four leaders in the independent SME lending sector to gauge attitudes to asset finance, responsible lending, and whether market conditions can encourage further growth.
Jim Higginbotham has been managing director at Wyelands Bank for 10 months, and was brought into the bank to help build an asset finance capability.
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Prior to this position Higginbotham worked at Lombard, giving him valuable insight into the question of whether larger retail banks have been less willing to serve the SME market:
“In the pursuit of greater efficiency, larger banks have had to deliver highly efficient automated client-service models. What that has led to is a large proportion of the SME sector becoming a little disenfranchised. Businesses that previously enjoyed a human-touch relationship model have now been pushed down the more automated service model route.
“That has left a fairly big opportunity for smaller players in the marketplace, who have got the agility and desire to deliver a more relationship-based approach where SMEs have access to decision makers.”
There is prevailing theory in the world of asset finance that the rise of independent banks coincides with the increasing caution by larger retail banks following the financial crises that rocked the global economy during 2007-08. However, according to Michael Schozer, chief investment officer at Hadrian’s Wall Capital: “Issues over the lack of SME access to asset finance have been going on for 30 years, accelerated through the closure of banks’ branches across the country.
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By GlobalData“Previously if someone had a £10m business in Leeds and wanted to borrow £1m, they would walk down the street to a local branch and speak to somebody there who was responsible for local corporate businesses. Those branches over the years have been reduced and reduced.”
Brexit
Another reason given for any caution in the UK’s finance arena has been the ongoing political fallout from the referendum decision to leave the EU in 2016. Nevertheless, Finance and Leasing Association (FLA) results show that the total asset finance business hit £32.57bn in 2018, a 3% rise on 2017’s figure.
Neil Davies, chief executive officer for asset finance and leasing at Close Brothers, is prepared to focus on the positives.
“We don’t know if the level of lending would have been greater without the Brexit situation or whether Brexit just hasn’t affected it,” he notes. “Certainly, business levels at Close Brothers have increased rather than decreased.
“Generally, since 2009, SMEs haven’t done things on a whim: they’ve done things when they need to do them. There are no current increases in defaults, and the company is seeing increases in business levels. Overall, sensible decisions are being made, and people are not holding off because of Brexit.”
Jason Oakley, chief executive officer at Recognise, a City of London Group subsidiary, is also aware of the challenges that Brexit may face for independent SME asset finance. “The biggest single thing is a lack of clarity,” he says.
“This leads to uncertainty, and uncertainty brings risk-aversion. Recognise has experienced the cash holding to businesses going up, and there is a lot of risk-taking dropping in terms of growth and investment.”
Increasing Competition
In a market that is successful and profitable, there is bound to be increased competition, and resulting concerns of maintaining profitability and protecting against irresponsible lending practices.
According to Higginbotham: “In any marketplace there is going to be a spread of lenders with different risk appetites and different return expectations. Some are going to misprice that risk, and some will get it right. At Wyelands Bank, we are not positioning ourselves to be the cheapest on the marketplace, but we want to make sure that we are representing a fair price for a fair amount of risk.”
Oakley is willing to look at the issue from a consumer perspective, saying: “Increased competition can be pretty good for the client as they can find better deals. Additionally, where there has been any new competition, lenders have tended to focus on a particular niche or highly focused level of expertise. Those that are successful are customer driven in terms of their continuity and responsiveness.”
Disruption
With some high street banks having existed for centuries and practising asset finance for decades, this is an arena that can be seen, paradoxically, to be both resistant to and dependent on external disruption.
Of this challenge to enact change, Davies says: “There is less technology disruption in our market. A company can do all the administration with artificial intelligence in seconds, but then have to wait six weeks for an invoice.
“There has been very little growth of price-comparison sites in asset finance. I think particularly in the SME market, when you look at the surveys of who do they know to talk to when they want asset finance, it is their clearing bank and maybe one other.”
According to Schozer: “To some degree the banks have pulled back SME lending of their own volition. Independent SME lenders are not comparable to a company like Uber, which has disrupted the taxi market. The banks have been pulling back their bricks and mortar, which were expensive, for decades. They have helped facilitate the rise of alternative finance providers themselves, outside of disruptive practices.”
Broker Channel
For all new entrants into asset finance, the broker channel is of great importance, offering a valuable route of access to SMEs that are seeking finance. According to FLA results, in 2018 broker-introduced finance was up 8% to £545m, and sales finance was down 11% to £707m.
As to how to manage broker relationships, Oakley says: “The National Association of Commercial Finance Brokers is a good example of an association with very high standards that can also be a great contact for the industry.
“From here, it is about identifying the brokers in each market and giving them a superior experience. The best way is to give them a customer-driven experience, and to give them the confidence that they can refer to your company putting their reputation in your hands rather than to a different lender.”
For Davies, simple market forces are a greater motivator. “Historically, new entrants to the SME lending market have benefitted by paying more fees than anybody else,” he notes. “Yet with this strategy, brokers could move on to another lender if they were offered a little bit more. This may be why there should not be exclusive focus for a company on the broker channel. In order to grow a sustainable business you need a mix of sources of business, and typically that is direct or indirect through vendor streams.”
The Next 12 Months
While there has been success and a resulting growth in competition, the aforementioned concerns over areas such as Brexit and general economic uncertainty around the globe have raised questions of whether this growth in SME asset finance can continue. While no one can predict the future, senior figures at an independent lender are in as good as a position as any other to see where the market may be going over the next 12 months:
“There are market forces in both directions, so as to whether growth can continue is a tough one to call. The physical funders into the SME market might shift a little bit so that the risk profile of the available deals turns down slightly, but the overall levels should remain relatively stable,” says Higginbotham.
“Wyelands Bank is looking to increase our lending into the SME sector. When starting from a relatively modest base it is an obvious aspiration to grow from that. There is a hope to play a sensible place in a marketplace that overall should be relatively stable.”
On whether to anticipate an increase or decrease in lending over the next 12 months, Oakley says: “This is partly dependent on what the Brexit outcome is. Right now there is a degree of pent-up investment in the country that hasn’t been unlocked yet and is pending some clarity on the situation. Assuming we have a sensible Brexit outcome, we could see volumes increasing over the next 12 months; if, however, there was very detrimental hard Brexit that was economically very difficult, then that would give it a different complexion.”
Technology in Leasing
As Davies notes, with the increasing need to include features such as price-comparison sites, technology is an axiomatic element of combating and updating the traditional leasing sector.
For Higginbotham: “Wyelands Bank has tended to focus its energies on the technical side of things, with focus on a core operating system that enables the bank to have a lot more stability around the product set on offer.
“There has been less focus on the automation of front-line origination, the automation of decisioning. Wyelands is looking to assess each customer on their merits with a manual underwrite situation, instead of falling into that ‘computer says no’ category.”
For Schozer: “There is a huge number of smaller lenders who reach out to customers online – an area of outreach that didn’t exist in this sector until recently. A lot of the further differences to the leasing sector have been tech-driven, whether underlying analytics or on the marketing side. If you look back to how SMEs borrowed10 years ago, it was radically different.”
Consumer Awareness
A prevalent issue in independent SME leasing has been simple publicity – a need to continually refine the art of letting companies know that there are alternative lenders to their high street banks out there, ready and willing to provide capital.
According to Davies, Close Brothers recently carried out a survey under the impression it was retaining about 85% of its SME customers. The data from the survey showed that at least 7% of its customers had not borrowed money for about five years. This led to a summation that customers had not moved away from Close Brothers, but that they did not need to borrow money on a regular basis.
Assessing both this issue and what is being doing to rectify it, Davies says: “A lot of SMEs don’t need money every week, therefore they are not experts in it. When they want money, it is not a complex issue, they don’t care what shape or colour it is. There is probably more to be done through vendors who could proactively offer the right type of financing for customers – although, if you wanted to increase the financial education of SMEs, that is going to take quite a while.
“Close Brothers works with a number of trade bodies, such as the Manufacturing Technologies Association. Being close to these organisations and being able to get the message out there is useful.”
Davies continues: “Close Brothers also does a huge number of exhibitions, hosting stands that can explain to people what is happening in their sector. The company does more than 70 exhibitions in the UK a year, where if someone wants to talk about finance, there is the chance to have a conversation with them about it.”
The independent SME asset finance market has undoubtedly experienced accelerated growth, and with adequate risk assessment practices there is no reason why this sector cannot continue to thrive.
In the event of an economic downturn, those players that have been more responsible and those less so may become evident, but what is undeniable is that this is a sector that has stepped in to provide small business owners much-needed capital when sometimes the bigger players in the market were unwilling to assist.
