A blended approach to lending for SMEs

Growing businesses often struggle to access finance.  Recent Bank of England data reveals that lending to UK SMEs has flatlined over the last three years.

While many claim that the high street banks are not lending to SMEs, the situation is more nuanced.

Certain parts of the business finance market work well.  Smaller businesses are able to access finance from peer-to-peer platforms.  Larger business, or those with tangible assets, can be well served by high street banks and specialist debt funds.

The real problem is for the slightly larger, more complex SMEs which do not have assets to use as security.

Often these growing SMEs need more sophisticated financing.  That means the best funding solution may comprise a range of providers rather than a one-stop-shop.

To date, SMEs have struggled to find such a blend of providers and finance.  But access to genuinely unsecured lending and advice from accountants is now available.  So, SMEs can now get the blend of funding that best suits their business.

What’s the issue?

Growing SMEs often need between £500,000 and £5m in funding for the next phase of growth.  While banks can fund an amount that reflects the assets in a business, they can’t help if a business has no further assets.

Even when a business does have additional assets to use as security, it does not always make sense for SMEs to borrow against them from the same provider.

Complementary sources of finance can be better suited to helping fund growth.  Raising funds against the cash flow that the assets generate, as well as the assets themselves will increase the funding available.

Furthermore, different types of finance are best suited for different purposes.  For instance, it would not always make sense to use just one form of finance to cover working capital, replace old equipment and fund growth.

Such an approach is inefficient.  It fails to make the most use of business’s assets and capital and does not help the SME meet its financial goals.

Plotting a course through these issues is complex.  Very often SMEs need an accountant to help them navigate the maze.

What’s the solution?

Caple is the first in the UK to offer long-term unsecured lending of between £500,000 and £5m based on the future cash flows of the SME.  We do not require collateral or personal guarantees as security and our loans complement secured lending.

As a result, SMEs can now access genuinely unsecured lending, enabling them to raise funding from a range of providers.

This might mean the SME has existing secured lending from their bank in the form of a loan or overdraft.

They might also have another form of lending such as receivables or invoice financing to cover working capital requirements. Further unsecured credit to fund growth sits comfortably alongside all of these options.

By complementing lower-cost secured lending in this way, unsecured loans support a blend of financing.  This reduces the overall cost of funding while enhancing long-term growth potential.

How do accountants help?

In order to build a blended financing structure, SMEs often need the advice and expertise of an accountant.  Accountants and business advisers are an integral part of how Caple support SMEs to access unsecured lending.

We facilitate loans through our local partner network of accountancy and advisory firms.  As part of this, accountants also help SMEs to develop the business plans and financial forecasts that make the case for funding through our platform.

Funding growth

Proving the appetite for our unsecured credit alongside secured lending, we have now completed deals worth more than £23m.

Accountants and business advisers have played a key part in all of our deals, building funding proposals and providing independent advice to their SME clients.

With their financial nous and knowledge of their clients, accountants and advisers have been able to secure the blend of funding that best suits their clients.

In doing so, they have helped reduced the costs of financing and enhanced their clients’ growth potential.

Roy Farmer, corporate finance partner from Dains, explains how they help

When SMEs approach Dains accountants for help with funding, we first want to understand what the business is trying to achieve and what the funds will be used for.

It’s only by understanding both the business and the purpose of the funding that we can start to assess potential sources of capital as well as the cost and suitability of that capital.

We take time to understand our clients.  For instance, we’ll assess how much funding the business needs to achieve its short and long-term objectives whilst ensuring that they can service their debt repayments and meet their working capital requirements.

We’ll also take account of the director’s risk appetite and approach to lending.  Many owner managers do not want to agree onerous personal guarantees that many high street lenders now require for SMEs.

Often these personal guarantees can be as high as 20% to 30% of the loan value.  If a business is borrowing £1m or more you can understand why a director doesn’t want the personal risk.