#Lending & Leasing

Covid-19 is reshaping the UK SME lending market

Aug 27, 2020 - 4 min read
Mark Elliott, Business Development Manager at Sopra Banking Software

As disruption from Covid-19 ripples through society, the UK’s small and medium-sized enterprises (SMEs) are bearing a significant portion of the damage. A recent survey by Mckinsey shows that the pandemic has impacted more than 80 percent of these businesses.

As a result, many have been forced to postpone growth plans, lay off staff or face outright insolvency. In the wake of the 2008 financial crisis, SMEs had to contend with similar challenges. At the time, big banks moved to de-risk their balance sheets and shore up their capital, and in the process, SME lending in the UK shrank considerably. To avoid making similar mistakes, SMEs can look back and learn what they need to do to survive in these challenging times.

Avoiding previous mistakes

In recognition of their vulnerability, SMEs are the recipient of many of the UK government’s coronavirus initiatives, including business rates relief, the employee furlough scheme and various loan plans. Big banks are largely administering these and, given the severity of the current situation, there is a lot of pressure to make sure that financing is available.

Although lenders have already provided some £14 billion to SMEs through Covid-19 loan schemes, there are signs that traditional lenders are falling short. A Censuswide survey of 200 SME leaders found that 42 percent of businesses had waited over two weeks for a business loan application from their current banking provider.

There have also been anecdotal reports of banks reverting to manual processing and turning away people who are not existing customers. As a result, over 40 percent of the SME leaders taking part in the survey indicated they were looking to switch providers.

An opportunity for specialist lenders

Before the pandemic, and despite significant growth in the specialist SME banking and lending sector, most small businesses still used high-street banks. The coronavirus has accentuated pre-existing pain points, such as a lack of flexibility, speed of response and digital access. There is a big opportunity for specialist lenders to fill the gap and support smaller businesses.

What’s important is to have the agility to respond to current conditions. Over the last few months, activity has centered around the management of forbearance — facilitating payment holidays and more generous lending terms for a temporary period, for example. Lenders are also developing new procedures for making bulk changes to terms and accelerating change requests.

In the post-crisis world, the basics of underwriting and customer onboarding will need rethinking. Underwriting — including know your asset (KYA) and know your customer (KYC) processes — will need to be automated, done online and supported with real-time data validation. The future is also likely to require greater access to real-time account and transaction data, automated KYC and self-service options.

Looking forward

In a time when SMEs are struggling, it’s critical to ensure that as many as possible get support and can access external capital. The increased need for speed and efficiency is driving SMEs to seek new lenders.

As the post-Covid-19 downturn forces business owners to get creative, SMEs will continue migrating to lenders who offer more flexibility and are prepared to extend credit based on a better understanding of the risks of a particular sector.