How lenders can meet growing borrowing appetite from SMEs

Last year was undoubtedly a testing one for commercial borrowers.

Recent data from the National Association of Commercial Finance Brokers (NACFB) found that lending through such intermediaries dropped by 16% from the previous year’s total, coming to £38bn.

Of course, it’s worth bearing in mind that this is nonetheless a substantial figure, given 2022 saw the setting of a new record for loans facilitated by commercial finance brokers, while the improving borrowing environment means we are likely to see a more positive 12 months ahead.

That is certainly the message from our own ‘SME Pulse’ survey with brokers, a quarterly study where we aim to get the insights of our commercial broker panel into what’s happening in the market and with their clients currently, as well as what that might mean for the SME market in the future.

Property has become more compelling

What’s immediately interesting from our Q1 Pulse survey is that there has been a noticeable shift in the drivers behind borrowing by businesses.

While property purchase is still the main reason for SMEs looking to take on these loans, it’s become far more significant, now accounting for around half of all loans compared with a third of cases in our Q4 Pulse.

This is likely to reflect not only the improving terms of the finance available, but also the pricing of those premises.

We have seen the value of all forms of property take a hit over the last year off the back of borrowing becoming more expensive, but the pressures on commercial properties have meant vendors are even more likely to accept an ambitiously low offer. 

That combination has clearly left more business owners feeling that this is an opportunity to secure the best home for their business for years to come, and at an affordable price. 

Indeed, a separate question in our Pulse survey around whether property investors are likely to take advantage of the property market bottoming out this year further reinforced this notion, with three quarters (73%) of brokers suggesting this will take place as investors look to cash in on more attractive pricing.

Growing appetite

Businesses are also more minded to take this opportunity to refinance their existing debt, to bring together the various credit lines they have outstanding on new terms.

In our previous Pulse survey, it represented around one in five SME loans, but has now grown to just shy of one in three.

This increased appetite in borrowing for property purchase or refinancing has come at the expense of growth. Our Pulse survey found that just 17% of loans are with the intention of helping fund the business’s expansion, compared with 34% in Q4.

Overall, businesses were found to be keener on borrowing currently, with almost two thirds (62%) of brokers reporting increasing appetite among their SME clients, up from 45% in Q4 2023.

Just 2% of advisers suggested that business borrowing appetite was declining.

The pricing of business loans is clearly having a sizeable impact here. More than half of advisers pointed to lower interest rates as one of the main reasons for the increasing interest in borrowing, compared with less than a third at the end of 2023.

The study also pinpointed a greater appetite from lenders, and improvements to their policies, as boosting demand from SMEs.

This is a useful signal around what really makes a difference for commercial brokers. While pricing is obviously enormously important, so too are the lending policies being employed, the flexibility on offer when it comes to business lending and the processes around getting that funding in place quickly.

Lenders who are able to offer a combination of those factors are the ones that stand out from the crowd - competing on price alone simply will not cut it.

Overcoming access issues

While our study highlights the improved confidence among business leaders when it comes to borrowing, it also lays bare the challenge that many face in accessing the funding they need.

Almost a quarter (23%) of brokers said their business clients had had trouble in accessing financing, and while that’s an improvement on the 31% recorded in Q4 last year, it still represents a significant number of viable businesses who are struggling to get hold of the funding they need to progress and secure their futures.

Ultimately while the market has improved, there are still great swathes of industries where mainstream lenders simply will not go, or where terms are so restrictive that they are an unrealistic option.

That’s why it’s so important for brokers to work closely with lenders who are more flexible and transparent when working with SME borrowers. It’s something that we are committed to at Atom bank, regularly adapting our lending criteria to ensure that an ever-growing number of small businesses can qualify for financing.

Business bosses are confident about their prospects for the future and want to borrow in order to set themselves on the right path.

But those funds can only be secured by working with lenders who truly want to make a difference in the SME market, and have established the products, policies and lending processes which mean they can do so.

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