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The SME Lending Landscape in 2020
By Aaron Hughes
This time last year, I only made one prediction with any degree of confidence – that at some point, the UK’s future trading relationship with the rest of the world will be settled, and confidence and stable growth would return.
And I still stand by this a year later!
2019 was a tough year – for business and lenders alike. Although final quarter figures are not yet available, annual UK growth to September was just 1%, and both August and September showed a contraction in the economy.
Atradius are predicting 2019 to have had a 10% increase in business insolvencies – the highest rate in Western Europe - with a further 5% increase next year.
Meanwhile the Bank of England have revised downward their forecast for growth for next year to just 1% - and that is dependent on the end of Brexit uncertainty, an orderly transition from the EU, and businesses being properly prepared.
In this context, it is hardly surprising that the EY ITEM Club outlook on business investment shows lending growing by just 2.1% in 2020, the lowest level since 2015.
Away from these dry statistics and speaking to our customers in the Invoice Finance community, I pick up a sense of what these numbers actually mean.
The last 12 months of uncertainty has squeezed SMEs even further. Some of the very limited growth we have seen has come about only because of businesses increasing stock levels to protect themselves against potential Brexit related supply chain issues.
This has been a cause of cash flow issues for some, but in a shrinking economy, for others the increasing cost of materials, and the ever-worsening risk of bad debts, create particularly difficult trading conditions.
Amongst SMEs who use invoice finance, some of the cash flow bottlenecks can be smoothed out with the flexibility a receivables-backed facility can offer. But a bad debt or a drop in turnover can quickly lead to a crisis.
From the lender perspective too, increased competition in a market where lending growth is slowing means some challenging strategic decisions need to be made.
We have seen lenders responding by scaling back their risk profile, some withdrawing from whole sectors. But others have taken up the slack, flexing their risk appetite to take market share.
This has led to healthy competition in the market - and not just for the better-quality invoice finance deals. Higher risk, less “traditional” deals are also being chased, and across the board we are seeing some downward pressure on fees.
As a result, everyone is looking to improve their efficiency and safely manage more accounts with the same or reduced headcount. Client failure and fraud are increasing risks, while cost pressures and the need to maintain market share are key strategic drivers.
Having the tools at your disposal to safely support increased lending to the SME sector in 2020, with greater efficiency, will ensure those strategic goals are met, which will in turn help SME’s navigate potentially choppy and uncharted waters ahead.
Aaron has over 23 years of experience as an invoice finance and asset-based lending professional. The majority of his career has been spent in senior risk and operational roles, leading large teams and managing diverse portfolios of clients.
A former client, Aaron joined Equiniti Riskfactor in September 2012 with a remit to widen its reach. His previous roles have included National Head of Portfolio for GE Capital, Head of Operational Credit for Barclays and National Operations Manager at NAB. Whilst at Barclays, Aaron introduced the EQ Riskfactor software into the business and so can offer valuable support from personal experience regarding the implementation process for new clients.
Aaron has an impressive track record for delivering innovative solutions to loss mitigation in the commercial finance sector. These solutions have ranged from policy refinements to the harnessing of technology to improve the efficiency and effectiveness of risk management.