Institutional lenders revolutionising SME finance
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It’s still relatively under the radar, but the SME sector is undergoing a radical, and arguably irreversible, change.
The change is the emergence, in ever-growing numbers, of institutional lenders keen to provide finance to small and medium-sized UK firms, and genuinely compete for market share.
Since the Global Financial Crisis, SME finance has evolved beyond recognition, with a multiplicity of alternative lenders, specialist funders and challenger banks injecting a whole new energy into the sector — and reaping the rewards.
As the sector has matured, the interest and curiosity of institutional investors — think major pension funds and asset managers — has grown accordingly, all the more so with the search for yield in the continued low interest rate environment proving so challenging.
Redirection of funds
The result? A growing number of institutions are redirecting their funds away from listed equities and bonds and deploying them as growth capital and other forms of finance to the UK’s thriving small and medium-sized businesses — from asset and bridging finance to cash flow and unsecured loans.
As well as providing additional certainty of funding for would-be borrowers, the growing ranks of institutional lenders mean real business in their quest for market share.
For example, one major institutional lender we work with has recently launched an unsecured product with a flat fee of just £20k, even on a loan of £5m. To get the same sized loan from traditional senior debt and mezzanine providers would typically cost roughly ten times that.
In-house due diligence
The way institutions underwrite their loans also adds to the cash savings for SMEs. Rather than commission external due diligence, often at an additional cost of £25-£30k for the borrower, many institutional lenders prefer to perform their underwriting in-house.
This also saves time, which can be crucial for SMEs in urgent need of cash. For example, as long as all the necessary information is provided by the borrower, the institutional lenders we work with will aim to complete on a loan in just four weeks— a third of the time it takes the average high street lender.
Importantly, they’ll also tend to offer longer loan terms up to eight years and be less demanding when it comes to personal guarantees and warranties, which are a well-known stick in the spokes of many a corporate finance package.
Shopping around is key
Now what we’re certainly not saying is that the UK’s SMEs should turn their backs on retail, challenger and other specialist lenders. In many cases, they will offer the most competitive, or most appropriate, finance package.
But whether you’re a commercial broker, FD or CFO, the next time you’re looking to arrange finance, be sure to enquire about any institutional alternatives, a number of which will be offered through platforms like CODE.
The result could be a quicker completion, a far simpler loan structure and savings amounting to tens of thousands of pounds.
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CODE Investing has entered into a strategic collaboration with City of London Group to originate SME loans
CODE Investing has entered into a strategic partnership with BNP Paribas Asset Management to originate SME loans.
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