enterprise-europe.co.uk

Overview of the changing landscape of

business lending in the UK

Presented by Jim Doherty Operational Lead Director – Innovate UK Scale Up Programme specialising in Corporate Finance and growth funding for UK SME’s

The UK's alternative finance market — including marketplace lending, crowdfunding, and invoice trading — grew 43% year-over-year (YoY) in 2016, from £3.2 billion ($4.3 billion) to £4.58 billion ($6.17 billion), according to a recently released study from the Cambridge Centre for Alternative Finance.

enterprise-europe.co.uk

Introduction

" "

Post 2008 Financial Crisis – what has changed

Change in bank lending

Mini Bonds

UK Alternative Finance

Market

Crowdfunding

The British Bank Property Lending

Marketplace Lending

Fintech

Commercial Mortgages

Export Finance

Innovate UK Loans

Invoice Financing

Peer to Peer lending

Asset Finance

Business Market Place Lending “peer to peer”

• Figures based on 2016 findings • Key players include funding circle • Biggest share of UK ALT Finance • Key statistics - £881m share in 2015 to £1,232m 2016 28.5%

growth • Key challenges – managing lending risk, seeking out new lenders

as other offerings “hit” the space

“Peer-to-peer lending is the practice of matching borrowers and lenders through online platforms. Borrowers are often able to gain access to funds quickly and typically at lower interest rates than banks, making it an attractive loan alternative to banks” – source

Wikipedia 2015

Business Market Place Lending “peer to peer” cont’d

Commercial Mortgages

• Key statistics • New loan origination picked-up in

second half of 2017 (£26.8bn) • Alternative lenders, insurance

companies and other non-bank lenders provided nearly a quarter of new lending in 2017 (24%)

“A commercial mortgage is a mortgage loan secured by commercial property, such as an office building, shopping centre, industrial warehouse, or apartment complex. The proceeds from a commercial mortgage are typically used to acquire, refinance, or redevelop commercial property”

• Typical use – usually relates to a company needing to either relocate or expand on an existing premises. Strategic decision aligned to growth or market positioning.

• Advantages - puts the business in control of its built space asset, allows for surety of space and an ability to strategically develop in line with growth plan.

• Disadvantages – requires significant deposit (30%), will not include maintenance, upgrades etc, long term fixed asset not flexible to economic adverse changes

• Typical forms – long term debt, significant deposit, 15 to 25 year duration

Asset Finance

• Key statistics – 5% growth 2017 (Finance &

Leasing Association FLA) • £32 billion of business lending in 2017 • Of the total asset finance new business in

2017, £18.6 billion went to SMEs – 12% higher than in 2016

“Asset financing refers to the use of a company's balance sheet assets, including short-term investments, inventory and accounts receivable, in order to borrow money or get a loan. The company borrowing the funds must provide the lender with security interest in the assets”

• Typical use – company Y needs to by equipment but lacks working capital

• Allows the company to borrow against the value of the equipment in low monthly instalment plus interest

• Advantages – cashflow friendly, fixed interest rate for budget purposes, tax deductible cost

• Disadvantages – can’t p[ay asset recovered, cost of borrowing exceeds value of asset

• Typical forms – Leasing (operating / finance) Hire Purchase – main difference leasing no ownership, HP ownership

Pension Led Funding

• Key statistics – latest available numbers only relate to 2015 which showed 23 million raised in the UK by businesses deploying pension led funding

• It is believed that this figure will have risen significantly over the following years

• Typical pensions used are Self Invested Personal Pensions (SIPPS’s) and, particularly Small Self Administered Schemes (SSAS’s)

“Pension Led Funding (PLF) is a financial services product offered in the United Kingdom (UK) that raises funds for businesses based upon the use of pension benefits accrued by owners or directors of the business they control”

• Typical use – business owners utilise their pension pot to fund business without the need for personal security or charge over assets. One of the least heard about funding options available in the UK. Example provider pensionfunding.com

• Advantages – no security or charge over assets, interest charged on borrowings paid back into owners pension, designed to support growth SME;s not used as a distress or rescue vehicle

• Disadvantages – owners pension at risk if it doesn't work out

• Typical Terms– 7 to 10 years in duration with 7 – 12% interest (paid into pension)

• Regulated – UK only HMRC

Pension Led Funding

Merchant Cash Advance

• Key statistics – latest figures on UK debit

card sales are 7.5 billion and credit card sales £15 billion giving total sales traction of £22.5 billion

• Merchant cash advance providers are estimating significant year on year growth due to the relatively relaxed credit scoring and easy access of cash advances

• MCA landscape is seen to be one of the quickest growing form of alternative finance in the UK

“A merchant cash advance was originally structured as a lump-sum payment to a business in exchange for an agreed-upon percentage of future credit card and/or debit card sales. ... The term "merchant cash advance" may be used to describe purchases of future credit card sales receivables or short-term business loans“

• Typical use – new and innovative form of

alternative funding for SME retailers, based on use of card terminals, unsecured cash advance based on value of future sales, data analytics analyse sales trend and cash advance value

• Advantages – no security or charge over assets, cash advance based on sales trend so aligned to growth

• Disadvantages – dip in sales revenue affects future cash advance

• Typical Terms– % repayments based on card sales activity and value, potential advance of up to 150% of sales, typical cash advance value between £2,500 to £300,000

Cash Flow Loans

• Key statistics – C2FO Working Capital

Outlook Survey 2016 found that cash flow was one of the main issues facing UK SME’s

• 54% stated cashflow as their biggest obstacle to business growth

• Short term cashflow needs based on seasonality is seen as a major issue for UK SME’s particularly in retail and leisure sector.

“Cash flow loan is a type of debt financing, in which a bank lends funds, generally for working capital, using the expected cash flows that a borrowing company generates as collateral for the loan. ... In contrast, an asset-based loan is lent against company's assets“

• Typical use – vehicle aligned to gaps in an

SME’s working capital and typically used for seasonal adjustments, equipment purchase or contract fulfilment. More aligned to mature businesses rather than start ups due to the need for trading history.

• Advantages – the key word is quick, quick finance and quick repayments for bridging purposes based on short term cash flow pressure

• Disadvantages – higher rates of interest based on short term nature, invariably Director guarantees required in order for lenders to mitigate risk

• Typical Terms– average 6 month repayment terms

Invoice Discounting

• Key statistics – 2017 was a good year for

the invoice finance sector. According to figures released by UK Finance, the third quarter of 2017 saw a 13% year-on-year jump in invoice finance in the UK and now stands at just over £22bn, the highest ever recorded.

• UK Finance notes that the “exporting picture is particularly strong”, with sales from clients through export invoice discounting facilities up 33% in the first nine months of 2017, and export factoring up 11%.

“Invoice discounting is the practice of using a company's unpaid accounts receivable as collateral for a loan, which is issued by a finance company. ... The amount of debt issued by the finance company is less than the total amount of outstanding receivables (typically 80% of all invoices less than 90 days old)”

• Typical use – designed for growing SME’s who

have a strong debtor profile and debtor days within industry averages. Cash advances are aligned to sales growth and managed against actual trading activity. Two types Factoring and Invoice discounting – Factoring externally managed debtor book, ID internally managed debtor book.

• Advantages – aligned to trading growth, can grow facility as sales grow.

• Disadvantages – value of outstanding debtor disallowed after a period – usually 90 days – can severely affect cash flow availability if not managed carefully.

• Typical Terms– 80% of invoice value advanced for a period up to 90 days.

Mini - Bonds

• Advantages– Bonds give you a regular

return on investment. less risky than investing equity in a start-up however carries a fixed return on investment company but the return on investment will be fixed. However, Capital remains at risk as bonds are unsecured, non convertible and whilst they may be transferable, liquidity is not guaranteed.

• Alternative finance platforms offer the investor the opportunity to diversify over a larger number of investments managed via the platform.

“Mini-bonds are a way for individuals to lend money directly to businesses. They are in effect IOUs which the companies sell to investors. Typically they have terms of three to five years, and investors earn regular interest payments during the life of the mini-bond” • Typical use – Bonds allow established

businesses to borrow sums of money from investors, who come together via a lending platform such as crowdcube. Investors receive interest payments payable annually until the end of the bond.

• Example, invest £1,000 in a four year bond with an interest rate of 8% per annum. £80 (before tax) of interest each year for the next four years – total return £320 return on maturity of the bond original investment of £1000 is returned to investor.

• Difference between equity – Equity is purchasing a percentage or portion of a business, usually in the form of shares. Whereas, bonds are a debt based investment where you lend money to a company for a fixed return.

Export Finance

“Export finance refers to financial assistance extended by banks and other financial institutions. to businesses for the shipping of products outside a country or region. Export financing. enables MSMEs to expand its reach to a global audience”

• Typical use – designed for growing SME’s who

have opportunities to enter the export market but lack the capital.

• Typically banks with letters of credit (the bank provides greater security for exporter-to-customer transactions. The letter ensures that the customer will pay the specified amount within a specified timeframe once the exporter has fulfilled the shipment and delivery terms). however stricter credit and evidence exporting experience have impacted on SME’s accessing credit.

• Subsidiary banks from target market. • Export funding available from Factoring providers • UK Export Finance can help with guarantees,

insurance policies and direct loans.

Non Bank Term Loans

• The changing regulatory regime for banks

has subjected them to shrink their loan books, particularly longer term liabilities. This funding gap presents an opportunity for non-banks, outside this regulatory regime, looking for diverse investment opportunities with UK borrowers.

• The Financial Stability Board described shadow banking as “credit intermediation involving entities and activities (fully or partly) outside the regular banking system”. This is a very wide definition which encompasses a very broad range of investment activities.

“A term loan is a monetary loan that is repaid in regular payments over a set period of time. Term loans usually last between one and ten years, but may last as long as 30 years in some cases. A term loan usually involves an unfixed interest rate that will add additional balance to be repaid”

• Typical use – designed for growing SME’s with

good credit rating and established for at least two years. Will need healthy turnover in excess of 100K. Some form of guarantee will be required in the form of good credit rating, collateral or guaranteed cash flow.

• Advantages – structured repayment plan, quick decision making process.

• Disadvantages – higher interest rate than traditional bank loans.

• Typical Terms– between one to five years but can be much shorter

British Business Bank- Start Up Loan (Unsecured)

Government-backed personal loan available to individuals looking to start or grow a

business in the UK.

For the business (SME):

• Start-ups

• Innovative/Growth oriented

For the project:

• Can borrow £500-£25,000, all Directors can individually apply with a max. cap of £100,000 per

business

• Fixed Interest Rate of 6% p.a.

• Free mentoring support for 12 months (only for businesses less than 2 yrs old)

• Exclusive business support offers

Innovate UK Innovation Loans – Pilot

Programme

For the business (SME):

• Innovative

• Growth oriented

• Scale-ups not start-ups

• Credit constrained

• Later stage R&D project (experimental development) with clear route to commercial success

• Risky project / company

For the project:

• Structured for project and commercial success

• £100k to £1m

• Low interest rate – 3.7%

• Interest only for first 3 years

• 5 year repayment period

Conclusion

• The UK Lending Market has changed dramatically post the financial crisis of 2008

• Some have called it the democratisation of lending, a direct response to the traditional lending

sources being tainted with unprecedented levels of mistrust – think RBS, Northern Rock,

Barclays, Lloyds, the PPI Scandal, the LIBOR scandal, collapse of Lehman Brothers, austerity,

regulatory frameworks, quantative easing etc – the time for change was inevitable and

technology provided the catalyst – the Fintech revolution!

• Whilst businesses still experience the pressures they always have, failures and successes are as

inevitable as death and taxes, there is a new breed of funders, investors and borrowers who are

positioning themselves in a far more savvy and competitive landscape.

• There is no such thing as a bank manager any more, AI, Machine Learning, Algorithms, Quick

access to capital, the rise of the start up entrepreneur to almost rock star status, more alignment

with the start up eco system and encouragement to grow from government and support

institutions, Scaleup, Innovation, The concept that we are all self employed in some way, these

changes have been exponential in a very short time frame. The last decade has been an epoch,

and its not over yet!

Thank You