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Challenger banks defy gloom to drive SME lending | Allica Bank | Photo of sunlight through trees

Challenger banks defy gloom to drive SME lending


It should come as no surprise that economic conditions over the past year have put a brake on business ambitions. But the downbeat figures mask a surprising shift in business lending.

16th May 2023
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More than half the brokers polled in a recent Allica Bank survey said their business customers had trimmed their 2023 borrowing plans in response to the slowing economy. A third of them said plans were “severely disrupted”, but 50% said only small adjustments were needed, so there is still some life in the market.

The 2022/23 Business Finance Markets report released in March by the British Business Bank confirmed that it had been a challenging year for small business lending. As their financial positions came under pressure last year, the proportion of smaller businesses using external finance dropped from 44% in 2021 to 33%. 

The lending figures highlighted difficulties accessing finance, but gross bank lending to smaller businesses still rose 12.3% to £65.1bn, thanks to larger average loan sizes, the report noted.

High energy prices and inflation may have suppressed activity, but challenger and specialist banks stepped forward to account for 55% of that lending (£35.5bn). 

“We’ve seen a staggering reversal over the past two years,” commented Allica Bank chief product and strategy officer Conrad Ford. “For the first time in my lifetime, the majority of lending came from specialist lenders rather than high-street banks.”

Big shifts in the lending cycle

The circumstances behind this reversal go all the way back to the 2008 global financial crisis. In the aftermath, big banks cut back their business lending. Businesses and their advisers were left in the lurch, prompting regulatory reforms that sparked the subsequent fintech boom, Ford explained.

“In spite of the hype about fintech, we had a long period of stagnation and low demand in the second half of the 2010s. Demand seemed to be sated,” he said.

Then Covid hit and changed everything. “It’s difficult to overstate how much impact Covid had on SME [small or medium-sized enterprise] lending. In 18 months you had 10–20 years of lending volume take place. It was like Dunkirk – you had every funding source laying out money,” Ford continued. 

When the economy opened back up after Covid, labour shortages and the Russian invasion of Ukraine prompted another tectonic shift back to “normal” interest rates. 

“One of the reasons for the stagnation in previous years was because it was extremely cheap to borrow and raise money. Now we’re back to historically normal interest rates, it’s having a huge impact on the lending market,” said Ford. 

These changing circumstances are most severe for the 500,000 medium-sized businesses (10–100 employees) that represent 30% of the UK economy. “Mid-size customers are stuck in the middle and not being well served by the high-street banks,” said Ford. “They’re too complex for consumer banking platforms, but too low value for the banks’ corporate services.” 

The lending gap

At the top of the lending tree, the large banks tend a few thousand corporates with very complex, but highly lucrative needs with concierge-style relationship directors. At the other end of the market, banks are able to offer simple, consumer-style loans and banking services to uncomplicated micro-businesses quite cheaply.

But the big banks are less willing to take on mid-size business loans anymore, because of the operational cost. “That’s why they take the ‘Computer says no’ approach. Everything that doesn’t fit the cookie cutter gets rejected and they can take two to three months to make a decision on commercial property loans. It’s probably why specialists are taking over. They can offer these companies access to funding targeted at them and much faster decisions.”

A fintech veteran, Ford identified this lending gap at his previous venture, Funding Options. As a pioneering online lender, Funding Options saw first hand the banks’ loan volumes. After a period working as a consultant to Starling Bank, Ford joined Allica Bank, which was targeting the unmet demand with a full range of digital banking services for scale-up businesses. 

Allica’s recently published 2022 financial results reflect the broader industry trend with 534% revenue growth to £48.3m (mainly interest) on lending balances worth £1.35bn and moved into profitability during the second half of the year, Ford said.

“This is the year everything comes together. What’s unequivocal is that customers want a human relationship. You can’t run a medium-size business with a ‘next available’ call-centre relationship.” 

Looking at the wider lending landscape, Ford said lenders are still willing to support businesses with good management and ambitions to grow. “The mistake is assuming that the only source is your bank. As long as you can explore the market with someone who knows what they’re talking about, there’s a lot of appetite out there. If your high-street bank gives you a no, it’s no longer the end of the road.”

Visit the Allica Bank website to find your relationship manager and speak to them about how your clients might be able to benefit from their expertise and services.

Replies (2)

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By Hugo Fair
16th May 2023 17:42

I understand that this is a pure advert (for a 'bank' of which I've never heard) ...
... BUT, with a title of "Challenger banks defy gloom to drive SME lending", there wasn't any room to pose the question as to whether it is wise for the average SME to seek to *increase* borrowing?

Mr Micawber would not be amused (and rightly so in my opinion).

Thanks (2)
Replying to Hugo Fair:
By johnjenkins
17th May 2023 11:23

The only reason lending has increased in the small business sector is that the lenders make more profit and the borrowers don't have much choice.
As always the super rich control.

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