In their search for yield, more and more institutions are looking for ways to deploy growth capital and other forms of finance to the UK’s small- and medium-sized businesses.

Pension or asset management funds that historically would have found their way into listed equities, corporate and government bonds are increasingly being directed towards SMEs — in the form of structured and asset finance, HP and leasing arrangements, bridging facilities, cash flow and unsecured loans.

And the rates institutions are offering – coupled with the way they’re structuring their loan packages – offers a genuine threat to the current ranks of specialist lenders and retail banks, both high street and challenger.  

Take unsecured loans as an example. The arrangement fees on these loans can be significantly less than with the retail and specialist lending route, for example, one institutional lender we work with has recently launched an unsecured product with a flat fee of just £20,000. 

This is irrespective of loan size, so even on a £5m unsecured loan that might cost a client up to £200,000 in fees from traditional senior debt and mezzanine providers, the same £20,000 flat fee would apply. It’s a major step change in the market.

The savings don’t stop there either: institutional lenders also have a different approach to underwriting unsecured loans, preferring to carry out their due diligence in-house rather than through an external provider. This means SMEs can avoid additional financial due diligence costs of £25,000-30,000 on average. Another major positive.

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Skipping the external duedil also saves time. Lots of it. In our experience, subject to all the necessary information being made available by the borrower, institutions will aim to complete on a finance package in roughly one month. This compares to two to three months for the average high street lender — and as any broker will know, speed counts.

Institutional lenders also tend to be less fixated on warranties and PGs. As brokers will know, these can often be a critical stumbling block in a loan application and so their absence again makes the outcome more certain.

Even more headroom for SMEs seeking finance comes with the fact that institutional lenders will often offer longer loan terms. One lender we work with will offer up to eight years, compared with a maximum of five years for a typical bank.

And with more and more institutional lenders moving into the SME sector, the market is becoming increasingly diverse, which provides greater certainty of funding across all categories of loan finance.

Now what I’m categorically not saying is that brokers and their SME clients should avoid retail and specialist lenders altogether. In many cases, especially with simpler and smaller loans, they can offer the perfect solution.

But the next time you’re looking to arrange finance for your SME clients, spend an hour scanning the market for institutional alternatives, many of which will be offered through platforms like ours. You could be surprised — and, a month down the line, your client could be sitting pretty.

Best of all, in the short to medium term, we expect the number of institutional lenders providing SME finance to grow exponentially, which will make terms and rates — typically of 6-9% — even more attractive. Exciting times