Latest Lending Trends for SMEs and Mid-Market companies

Banking partner at Shakespeare Martineau Jake Holmes shares the latest trends for SME and mid-market lending across the South, including insights from his banking and advisor contacts.

Market sentiment

With the UK general election behind us and interest rates falling, the appetite for lending to the region’s businesses remains strong across most sectors, despite lower transaction volume.

This is, in no small part, down to the quality of the businesses. As John Turner, area director at Lloyds Banking Group explained: “We’ve seen over recent years that SMEs on the South Coast are very resilient – they’ve experienced Brexit, Covid, supply chain issues, the cost-of-living crisis, inflationary pressures and rising interest rates. They’ve managed to survive and thrive, despite these headwinds.”

Tech remains a hot sector, as Carey Moore, regional director at NatWest, highlighted: “Technology businesses are particularly desirable to lenders given their growth prospects, and there is no sign of this abating.”

Anthony Donohue, head of corporate, added: “This is a focus sector and we’ve been really effective in supporting such businesses through NatWest’s new product, which allows intellectual property to be leveraged as collateral for borrowings.”

Illustrating the improved market sentiment, Santander UK reported a record year of new client wins, particularly SMEs. Matt Shaw, regional director, noted: “Manufacturing and wholesale businesses continue to thrive, particularly those trading internationally. Debt processes have ramped up and our Growth Capital team are looking at some notable transactions completing Q4/Q1.”

There are inevitably pockets facing challenges; such as the construction industry where developers are struggling to achieve gross development value sales. The commercial property market also remains somewhat subdued. Dan Curtis, in-house counsel at MSP Capital, commented: “At the start of 2024 we saw signs of the market picking up. The interest rate cut stimulated activity from first-time buyers and the election brought renewed optimism, however warnings of a ‘painful’ budget led to a return of uncertainty in the market, with clients delaying or even halting transactions.”

The resulting downturn in real estate activity has created some interesting shifts in the property financing market. As Ben Myers, commercial finance manager at Onyx Money flagged: “Developers have faced tighter margins, leading them to approach opportunities with greater caution. However, whilst we’ve seen a decrease in the volume of funding requests, the quality has notably improved.”

At the same time, it can’t be overlooked that uncertainty brings opportunity and, as Dan Curtis points out, “Opportunistic clients wasted no time seeking out lenders capable of making swift decisions to strike deals where vendors needed to complete before the budget was released.”

Key trends:

1. Liquidity and sources of capital

Capital remains readily available for businesses across the South, but it is fair to say that it is being provided by, and sourced from, a broader range of suppliers than before.

We’ve seen an increase in wholesale financing as a workaround to direct lending to businesses with higher risk profiles. Moreover, where some banks have indicated a diminished appetite for smaller deals, this has created opportunities for other lenders to pitch for transactions where they would previously have been outpriced.

Similarly, borrowers are now looking at the whole market when evaluating how they meet their capital requirements, and increasingly this includes debt funds. Funds are issuing credit-backed terms much quicker than major banks and this ability to mobilise makes them attractive to businesses.

We’ve also seen an uptick in equity being used to fund investment. Cat Dilloway, investor at Business Growth Fund, reported: “We’ve had a really busy year so far, and have deployed £18m into businesses on the South Coast. It’s a vibrant region for SMEs, and we can see a lot of opportunities to deploy more growth capital, partnering with ambitious businesses in the area.”

2. Softening of lending criteria

With increased competition among major banks, bolstered by the availability of private equity capital, there has been a marked softening of lending criteria. A prime example is the treatment of vendor debt on transactions, with senior lenders no longer insisting this be fully subordinated (albeit this has meant intercreditor negotiations are more protracted).

3. Increased lender commitments

We’ve witnessed banks taking higher ‘single-holds’ on transactions, when previously they’d share their commitment with other lenders through ‘club’ deals; possibly as a means of achieving growth in a somewhat volume restricted market. It’s now common to see single lender deals of £50m.

4. Demand for flexibility

Perhaps it should come as no surprise given the turmoil of recent years, but there is a definite shift to borrowers seeking greater flexibility when it comes to debt terms.

Jeremy Richards, director at PKF Francis Clark notes: “Customers appear willing to pay higher margins/fees to achieve flexible terms including bullet (vs amortising) repayment profiles and additional headroom in financial covenants.”

There’s also been a resurgence in accordions (where possible upsizes in loans are baked into facility agreements) and businesses are either seeking ‘five-year money’, or extension options are being incorporated to allow them to extend facilities by one or more years.

With more funders than ever to approach, there is plenty of scope to explore such options.

5. Sustainable finance

Despite sustainable finance remaining a priority for banks, there’s been modest uptake in the SME and mid-markets. Recognising that this may be attributable to the perception that external monitoring costs (to demonstrate compliance) might outstrip the benefits to be gained through such facilities, certain banks are introducing streamlined products and tools (particularly for SMEs), such as Lloyds’s clean growth finance incentive scheme and green buildings tool.

It’s worth noting that most banks now have a mandatory section in their credit paper dealing with sustainability, so businesses need to address this when borrowing, even where they’re not looking to utilise a sustainability product.

6. Timelines

Lenders unanimously report that transactions are taking longer; the average duration stretching to several months in some cases. The reasons aren’t entirely clear, although when it comes to acquisition financing, this may be because the underlying acquisition process has slowed. It’s quite common to see late-stage price chips which can reopen negotiations and stall completion.

7. Attitude to business underperformance

Despite businesses breaching financial covenants (largely those exposed to discretionary consumer spending, like hospitality), we’ve seen little evidence of bullish enforcement behaviour from lenders, save for when businesses fail to engage after experiencing financial difficulties. As Graeme Lipman, director at Begbies Traynor says: “Proactive communication with lenders remains key. Lenders are most amenable to supporting businesses that demonstrate transparency."

Outlook

As it stands, there is a sense of renewed optimism for the SME and mid-markets across the South Coast, and we expect lending activity to remain strong throughout Q4 2024 and Q1 2025.

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