Paul Tombs at Zurich look as soaring debt levels with smaller companies and asks if we should we be worried about the UK’s lending culture?
Over the course of 2017, borrowing among British small and medium-sized businesses is expected to soar above £50bn, with the Zurich SME Risk Index reporting that SMEs that borrow are expected to borrow an average of £41,770. This represents an increase of 22 per cent compared with 2016, when small businesses borrowed on average just £34,375.
High levels of borrowing are a growing trend among UK SMEs, a trend that has developed in spite of the increasing challenges they have faced from traditional lenders, such as high street banks, since stricter governance was put in place in 2008. Undeterred, a significant number plan to borrow more than £100,000 this year, while some small businesses have reported plans to borrow more than £1m.
For those continuing to borrow, the sources of loans are diversifying. In the place of banks, SMEs are increasingly turning to alternative lenders. These include crowdfunding sites and peer-to-peer lending platforms, and frequently offer greater flexibility and speed. For some, this may seem like risky business, but importantly, they are more accessible than their high street counterparts and for the last two years, they’ve also been endorsed by the government-mandated Bank Referral Scheme. The scheme makes it obligatory for banks to pass unsuccessful applicants to designated alternative finance platforms. Any business owner who was not previously aware of the scheme should make themselves familiar with the alternative lenders who are part of the programme.
Small and medium businesses are seizing the new opportunities these sources present and loans from alternative sources to SMEs are on the rise. In the second quarter of last year, close to one in 10 small firms applying for credit applied for funds from a direct lending platform and, more recently, a report from the University of Cambridge showed that more than 12 per cent of new lending to SMEs came from the peer to peer sector. The growth of easy-access lending provides some explanation for the rise in this year’s borrowing average.
This rise in borrowing is not something to be feared. Borrowing can be an indicator of confidence, investment and growth, and when we speak to small businesses, we start to see a clearer picture of a nation borrowing sustainably. For a start, the credit crunch didn’t just affect banks. SMEs have shown similar levels of responsibility, and the majority now identify as “happy non-seekers”, or “permanent non-borrowers”. These SMEs are self-sufficient, don’t need a loan, and accounted for almost two thirds of SMEs in both 2016 and 2017. Their presence is evident across the last ten years, with more than half of all small and medium-sized owners not taking out a single loan.
And even when it comes to habitual borrowers, the UK business arena can hardly be described as having a credit problem. It is true, the majority of small and medium sized businesses that have taken out a loan in the past ten years have taken out more than one, and many admit to taking out at least five in the time. But, among the latter, the majority we have spoken with have a net revenue of more than £1 million, and nearly two in five have a net revenue of more than £10 million. The evidence suggests that they are servicing their debts effectively with strong revenue streams – this is not the profile of a borrower who should necessarily be being turned away.
That said, rules are rules. Banks have had to rein in their lending habits and so alternative lenders are, in their own way, saviours for business owners who continue to develop sustainable business plans, accounting for the risks of the current environment. The alternative lending landscape is relatively untamed and as yet only a minority of small businesses are currently even aware of peer-to-peer lending. Business owners should consider alternative avenues, but they must do their homework, and fully explore all of the borrowing options available to assess what works best for them.
There are a number of smaller issues in today’s business environment, but reports from the UK’s small businesses tell us that, overall, the economy is solid. If you are not a “happy non-seeker” and business growth is the goal, alternative lenders may be a godsend. Just be sure you know what you are getting for your money.
Paul Tombs is Head of SME Proposition at Zurich.