UK’s uncertain economy putting spotlight on alternative finance
Rapidly rising costs of finance and ongoing economic uncertainty in the United Kingdom are underscoring the advantages of alternative lenders and non-traditional loan options.
With three different prime ministers in the space of two months, some of the highest inflation in the world, and interest rates rising at pace, the United Kingdom’s economy is seemingly stuck in a state of turbulence.
Since the start of 2022, businesses across the UK have been rocked by a series of significant economic shocks.
Russia’s invasion of Ukraine has spiked energy prices, inflation has risen to double digits, GDP growth is going backwards and the Bank of England is expecting a recession that could well push into 2024.
Newly installed Prime Minister Rishi Sunak will deliver a fresh economic strategy in mid-November, which analysts expect will provide business with some certainty around spending and tax policies.
But it will come just six weeks after short-lived PM Liz Truss’ September 23 fiscal statement spooked UK financial markets, sent the Pound into a spiral and ultimately cost Ms Truss her Downing Street address.
At the same time, businesses dealing with a high operating cost environment are facing a balance sheet squeeze due to increasingly volatile lending markets.
In early November, the Bank of England increased its Bank Rate to 3 per cent, the highest level since 2008.
The BoE’s chief economist, Huw Pill, warned of further rate hikes in coming months, as the UK’s central bank continues to pull policy levers to curb the rampantly rising inflation.
At the end of 2021, the BoE Bank Rate was just 0.1 per cent.
Gregory Taylor, Head of Banking and Finance at Baker Tilly network firm MHA UK, says the bleak economic environment had not yet been the catalyst for widespread company collapses, but was nonetheless causing considerable consternation.
UK taxpayers are likely to be on the hook for billions of pounds lost on pandemic relief loans, with more than £1 billion in ‘bounce back’ loans identified as potentially fraudulent.
“We’re trying to talk ourselves into a recession into the UK, and if we manage to do that, there will be some casualties,” Mr Taylor says.
“We’re seeing more signs of some distressed businesses in the UK, but overall, I don’t think we’re in that place yet where we’re going to start to see multiple business failures.
“That’s where you’ll start to see whether the money was lent in a prudent fashion.”
Rising interest rates, Mr Taylor says, are putting pressure on certain segments of the lending market.
However, Mr Taylor says it’s not the level to which rates have been hiked that’s causing concern, rather it’s the rapid nature of the rises.
“The political uncertainty and the other Bank of England interventions have caused the markets to run scared, and there’s nothing business hates more than uncertainty,” Mr Taylor says.
“For banks, it’s been the uncertainty that’s caused the difficulty in accessing funding rather than the rate rises, because they’ve come so quickly one after the other.
“It’s difficult for businesses. For example, we have one asset financier that will give us new rates at 9:00AM, pull them at midday, reissue them at 1:00PM, pull them again and reissue them at 5:00PM.
“So, at the moment we can’t speak to a client and promise them what the rate will be.
“One of our clients is using asset finance to buy nearly $US1 million worth of laser cutter, but there is a 40-week lead time.
“The lender will only hold the rate for seven to 30 days, so we can’t tell the client what that rate is going to be in 40 weeks’ time.
“As a business, it is really hard to plan financially – what we need is a period of stability.”
Portfolios under pressure
One segment of the financing market reeling from increased borrowing costs is buy-to-let lending, Mr Taylor says.
Typically designed for investors looking to buy property to rent it out, buy-to-let mortgages have been subject to a meteoric rise in interest rates over the last several months.
“Three to four months ago, someone with a strong loan-to-value ratio’s interest rate would have probably started with a three,” Mr Taylor says.
“Now, it would start with a seven. That’s gone up a lot, and that causes problems on both sides of the fence.
“Because interest rates have been so low, lots of large portfolios that had been highly geared to buy more properties are coming to the end of their fixed rates and can’t refinance because they can’t afford it.
“That’s an issue for the client, but it’s also an issue for the lender, because now they’re stuck with these highly geared portfolios that effectively you could argue can’t afford the cost of borrowing until they are able to increase the rental income.”
Alternative finance options
Mr Taylor says businesses do have several options if they’re struggling to obtain finance from traditional sources.
“Bridging loans are doing surprisingly well,” he says. “Traditionally, if you say bridging loan in the UK you think short term and you think expensive, but that isn’t necessarily the case at the moment.
“We’re seeing bridging loans that you can have over three years either on what’s called a retained basis, which means the interest is rolled up so there’s no monthly repayments on the loan, or an interest only basis that you can get for five to seven per cent per annum.
“So, on that basis, a bridging loan might just get you through the storm.”
Another option is invoice finance, where Mr Taylor says borrowing costs haven’t risen significantly and represent a viable option for businesses to release working capital from their balance sheets.
“There are lots of niche lenders and more products offered in that market than in traditional lending markets,” he says.
“There are selective facilities, there are construction-based facilities, revolving capital facilities, there’s all types of different facilities that operate with the collateral being the debtor book.
In a time where SMEs everywhere are struggling, it’s essential to maximise the options available for financial support to ensure that as many as possible can benefit from fast, efficient access to capital.
Banks will play an important role in supporting SMEs, but if we are truly to be ‘in it together’ then that must also include widening the array of alternative lending tools to benefit the widest audience.”