Full year review of lending to small businesses highlights the impact of Brexit

The year-end review of lending to small businesses conducted by Funding Xchange, based on data from over 30,000 small businesses seeking finance from more than 40 lenders, points to the impact of the prolonged uncertainty of Brexit.

Both small businesses and lenders are shown to have been more cautious, particularly from the period when it became clear that the Withdrawal Agreement would fail to pass through Parliament.

Funding Xchange is the main Government appointed online platform for businesses to apply for funding from a range of non mainstream lenders, having been declined by their own high street bank. During the year over 30,000 businesses accesses the platform providing Funding Xchange with extensive data covering sectoral splits, volumes and application quality.

Funding Xchange has seen a tripling of the value of funded deals in 2019 compared to 2018. This reflects the continued need of businesses to access non-bank finance solutions as are not in the position to provide the funding needed by many businesses. While the volume of customers going through the Mandatory Referral Programme has remained largely unchanged, the credit profile of these customers who were declined by banks improved in 2019 – indicating that the increased uncertainty had an impact on risk appetite of some banks.

‘Whilst there may be a small lag in the approvals data in Q4, with some applications still going through the system at the year end,’ explained Katrin Herrling, CEO of Funding Xchange, ‘there is a very clear trend established that both borrowers and lenders have been repeatedly holding their breath as Westminister discussions to manage an orderly Brexit grounded to a halt. It is not surprising that growth-related funding was not a major theme in 2019.’

Key factors that are highlighted in the Funding Xchange data are:

• The high street banks have become more cautious with their credit policies with the main adjustments taking place in late 2018 and some further tightening in the second half of 2019

‘We have seen a noticeable increase in quality of funding applications being declined by the high street banks, and then coming through the platform. Only 14% of companies accessing Funding Xchange through the scheme in early 2018 had a financial profile that suggests ‘viable demand’ where the provision of responsible lending is possible. This increased to 20% of referrals for businesses with the same profile in 2019,’ says Katrin Herrling, drawing on the data set out in the latest Quarterly Monitor published by Funding Xchange. ‘Some of this may be due to the banks not wishing to have a concentration in any one business sector, which has seen them rejecting applications notwithstanding their quality. Nonetheless, they have been rejected,’ she adds.

• Looking at specific sectors, Construction, Retail and Property (including Accommodation) have been particularly hit by the apparent concentration concerns and the flight to quality by the mainstream lenders, with a relatively higher proportion then being supported by other lenders.

• In the last two months of the year in particular, there has been a shift towards more sole traders and start-ups seeking smaller loans and overdrafts. These customer segments have suffered the most from reduced credit-appetite of lenders in 2019 and are increasingly finding it difficult to be funded.

‘The uncertainties brought about by Brexit have undoubtedly had an impact on the activity in the last quarter,’ says Katrin Herrling, ‘and we are watching carefully now, as we enter 2020, to see if the relative stability that it is reasonable to expect will result now that the government has a majority, will reverse the Q4/19 trend in Q1/20.’

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