Future Proofing – The Future for SME Borrowing In The Next Decade

According to a report published towards the end of last year by UK Finance, by 2025 Britain’s GDP could be anywhere between 9 and 14 per cent higher in real terms than it is today. And if the best-case scenario holds true, the UK population of small and medium-sized enterprises (SMEs) could be up to 30 per cent larger. This growth will have major implications for SMEs and Alternative Finance looks likely to play a major role in meeting demand.

Does the best-case projection sound over-optimistic? Well as the report – titled UK SME Finance: Past, Present and Future – points out, that 14 per cent rise in GDP and the associated sharp rise in the SME population to above 7 million is based on an assumption that annual growth will be marginally lower than in the period between 2010 and 2017. In other words, even if growth remains sluggish, the economy will continue to create new companies at an impressive rate.

Grounds for Optimism

Recent history underpins the report’s optimism. Growth has, in most years, been below the long-term quarterly trend of 0.7 per cent since the great financial crisis, but that hasn’t deterred entrepreneurs from starting and successfully running new companies. Looking to the future, UK Finance acknowledges that in the short to medium term, Brexit and wider trade uncertainties could severely dampen economic activity across the board, but strong growth is expected to have returned by the middle of the next decade.

Predicting the economic future is, of course, notoriously difficult, but if we assume that UK Finance is not too far off the mark in its projections, another question arises. In a post-Brexit environment, how will SMEs raise the finance they need to prosper and grow?  

Well, again, UK Finance is upbeat. The organisation’s figures suggest that in the 2015/2017 period, gross new finance supply came in at £82 billion a year. By 2025, this figure is expected to rise to between £107 and £145 billion, depending on the wider economic picture.

Bank Lending Set to Lose Market Share

But crucially, UK Finance expects to see a continuing trend towards alternative finance and a move away from new bank debt.  

In the most optimistic of the two scenarios – in which funding rises to £145 billion – the bank contribution to that total is expected to remain roughly where it is today when measured in cash terms.

AltFi to Play a Bigger Role

And as the figures suggest, equity finance and lease finance will both play a bigger role in funding SMEs as will Alternative Finance (AltFi). Depending on whether you look at the worst or best case scenario, AltFi funding is set to raise its market share from a current level of 4.0 per cent to 4.9 or 5.5 per cent.

This raises further questions. In fact, the options open to SMEs arguably extend beyond the categories identified by UK Finance. The private debt market is growing and we are also seeing growing (if early stage) interest in securitised token offerings underpinned by blockchain.  

The challenge for SMEs is to weigh up their funding options and choose the right solution at the right time.  

As UK Finance points out, while between 80 and 90 per cent of applications for bank finance are successful, there are still funding gaps. Businesses that fall through the traditional funding net include pre-revenue startups and businesses undergoing a period of stress (while often being viable in the longer-term).

Making a Difference

As things stand, Alternative Finance has already made a real difference. Crowdfunding has helped countless pre-revenue startups bring their products to the market and Peer2Peer (P2P) lending and invoice trading platforms are helping increasing numbers of businesses to address cash flow and capital investment issues.  

For its part, The Route – Finance has established itself as an important source of finance for property entrepreneurs and developers, in addition to providing special situations funding for a broader range of businesses. Again, these are areas where entrepreneurs and business owners can find themselves facing a funding gap. For example, a project may fall outside the lending criteria of traditional banks or indeed the risk criteria of some of the more generalist P2P lending platforms. The Route Finance’s Private Debt Platform enables a community of High Net Worth Individuals, family offices and institutions to back viable projects and business plans.   

Looking ahead to the coming decade, The Route would agree with the UK Finance analysis that the funding landscape is set to become more diverse in response to rising SME demand, but it may well be that Alternative Finance will play a much bigger role than projected.  

Because much of the strength of Alternative Finance stems from the diversity of the platforms and their business models, the proliferation of solutions  – including The Route’s Private Debt Platform – has made it easier for businesses to escape the funding gap and find the most appropriate source of finance.

To find out more please call: 020 3141 9040


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