The continued reluctance of UK banks to lend to small businesses and individuals has created a sense of frustration amongst politicians, SMEs and consumers. Following the economic crisis in 2007, UK banks have shied away from traditional lending to small businesses and have tightened their criteria on lending to consumers, preferring to diversify into alternative investments.
Stark figures show that the traditional process of business owners going to their bank manager has declined dramatically. Figures show that bank loans to businesses as a proportion of domestic lending has declined from 31 per cent in 1988 to 8 per cent in 2016.
Meanwhile, SMEs make up 99% of UK businesses and account for more than half of all turnover and employment – and many are urging for business capital, far beyond the £4bn provided by The British Business Bank.
With a wave of new businesses starting every day, many have turned their attention to what is termed as ‘specialist finance.’ A range of commercial products are available from non-bank providers, but rather independent finance companies who are driven by profit and can accommodate SMEs with faster finance, better rates, flexible terms and a willingness to consider adverse credit histories.
Examples of specialist finance include bridging, development finance, invoice finance, mezzanine finance, equity release and more. SMEs or contractors are typically required to provide some form of security, whether it is secured against their residential or commercial property, offices or a ledger of invoices.
Both homeowners and property developers are using bridging finance and development finance as a way to secure a property purchase within a tight deadline, bypassing the lengthy property chains associated with a typical mortgage. Funds are available from specialist lenders from 0.44% per month, with loan sums ranging from £50,000 to £25 million and a typical loan term of 3 to 24 months. With over 40 specialist lenders, the bridging loans industry has an estimated worth of £7 billion, up from £1 billion in 2011.
For those over 55 looking to release equity from their home, the rise in specialist providers focusing in this area has gained huge significant traction. Homeowners that own their properties outright can receive 30% to 90% of their home’s value in one lump sum upfront, tax-free and continue to live in their home.
Many consider this an alternative to a pension, instead preferring to extract equity from their home which the provider takes a stake and essentially ‘cashes out’ when you die or go into long-term care. The industry, championed by the likes of Legal and General, Aviva and Sun Life is now worth an estimated £3 billion by year, up from £1.8 billion in 2016.
Other nations such as Germany and the US have demonstrated success with government backed solutions to funding small businesses, without additional costs to the taxpayer. But with Brexit looming and other priorities, it looks like specialist finance is here to stay and grow significantly.