"Opting for institutional lenders can also provide additional flexibility for your clients, as they will often offer longer loan terms, which can reduce monthly repayments"
Something big is happening within the world of non-bank SME lending - big, in this case, being the operative word.
Over the past year or so we've seen considerably more institutional investors enter the debt finance market, and it's fair to say they mean business. For the UK's commercial brokers, this whole new lending channel is adding another major string to their (and their clients') bow.
The reason for the arrival of these big institutional investors is simple enough. They're on the look-out for returns in the ongoing low interest rate environment and are having to look further afield. Loans to established UK SMEs with proven track records and strong growth potential are looking more and more attractive by the day.
The timing isn't bad, either. There's a real funding gap at the moment for the UK's SMEs — for medium-sized companies in particular. While the biggest companies can get money easily enough from the high street, and smaller companies are well catered for by the growing ranks of alternative lenders, the middle ground is a bit trickier. But thankfully for brokers and potential borrowers, institutions are increasingly filling this gap.
They're offering finance to businesses in pretty much all sectors, with loans typically from £500,000 to £20m and starting at rates of 4%. The types of finance being provided are varied, from bridging facilities and structured and asset finance to HP and leasing arrangements, cash flow and unsecured loans. While individual lenders will have their own borrower sweet spots and preferences, between them they've got pretty much everything covered.
One benefit to the growing ranks of institutional lenders is the cheaper arrangement fees they tend to charge. For example, one lender on our panel offers an unsecured loan with a flat fee of just £20,000. This is even the case for a client seeking a £5m unsecured loan, which could sometimes set a borrower back to the tune of £200,000 in fees. It's a major sea change in the market and something all brokers need to be aware of.
There are more even more savings to be made with the big institutional lenders, as they tend to prefer to do their underwriting in-house. This means SMEs can avoid additional legal and external duedil costs, which can very quickly add up to £25,000-£30,000 and beyond.
The savings aren't just financial but time-based, too. For example, while a typical SME seeking a £1m loan from a high street lender could easily expect to wait two or three months, in our experience institutional lenders are turning the same loans around in around four weeks — as long as all the necessary information is provided by the borrower on time.
Opting for institutional lenders can also provide additional flexibility for your clients, as they will often offer longer loan terms, which can reduce monthly repayments and improve cash flow.
Ultimately, the SME lending landscape is shifting rapidly, and brokers need to be mindful of all the options. So next time you are scanning the market for your SME clients, it's worth a look through the institutional alternatives, many of which will be offered exclusively through a platform like ours.
And best of all, in the years ahead the number of institutional lenders providing SME finance is only going to grow — which will make the terms and rates even more attractive.