When we hear about the UK’s “squeezed middle” it usually refers to a part of society being put under pressure, but increasingly, it is the country’s mid‐size businesses that need help.
Since the financial crisis, banks have been pressured by regulators to tighten up their lending practices and put more money aside to cover losses incurred by certain types of borrowers. This has had a disproportionate impact on SME1s and their ability borrow as it has become more costly for banks to lend to them. According to Bank of England statistics in December2, since the end of 2014, there has been no appreciable increase in the amount of money UK banks have made available for companies to borrow. This reluctance in banks lending has had a varying impact on UK corporate financing behaviour, depending on the size of the company.
Large businesses have increasingly tapped international bond markets to fund their financing needs, while at the smaller end, start‐ups and micro‐companies are able to access peer‐2‐peer lenders and crowdfunding platforms. This has left a wide range of mid‐sized companies that have few borrowing options to turn to and this could adversely impact the real economy more generally. SMEs make up 99.9% of all UK companies, and contribute 52% of the country’s annual turnover. While a substantial number of these are micro‐companies with just one or two staff members, SMEs as a group employ 60% of the UK’s population. Without them working away in the towns and cities up and down the UK, our economy would collapse. In order to keep them moving, these businesses need capital – but from where?
Despite the undeniable rise of digital entrants to the lending sector over the last few years, such as P2P3 and crowdfunding websites, these alternative providers of capital account for a very small proportion of the overall UK loan market. Lending to UK companies by members of the P2P Financing Association in the last quarter of 2018 amounted to just £527m, according to figures published in March4. By comparison, in each of the three years to the end of 2017, gross new bank loans averaged around £58 billion, according to City business group UK Finance5, which noted the pullback in lending by these financial institutions. Average loans by these digital entrants are around £100,0006, so while useful for micro-businesses or seed investments7, mid‐size companies need to look elsewhere.
At BNP Paribas Asset Management, we recognised this lack of readily‐available capital for mid‐sized UK businesses, as those at each end of the scale were finding opportunities being made available to them. We also realised, along with other asset managers, that lending to this part of the market would offer well‐diversified return streams. At the same time, European Union regulators, through the Capital Markets Union, have moved to reduce SMEs’ reliance on bank lending and encouraged a broader set of institutions willing to put up capital. This has resulted in a wide range of asset managers moving to the sector, each concentrating on a slightly different part of the market.
At BNP Paribas Asset Management, we believe this “unaddressed middle” is where the most value can be found. We think the companies that typically have annual turnovers of between £2 million and £50 million, employ fewer than 250 staff and offer a niche, bespoke service or product, are the right candidates for our loans. Once we have filtered out the appropriate companies, we carefully analyse and research each one, and through careful risk management, we believe we can avoid significant default risks.
We strive to be a responsible lender. We have a responsible duty to the borrowers as well as to our clients. While we will price interest rates according to the risk we are taking, we ensure they are fair and suitable for the borrower. We know that lending to companies at excessive rates can be damaging to both sides of the deal. Instead of boosting our return on investment, lending at very high rates can actually undermine it, by making it harder for enterprises to turn a profit. Therefore, we aim to strike a firm balance between being rewarded for the risk we take and ensuring SME borrowers are able to pay.
Since 2018, we have been providing senior, unsecured loans from £500,000 and £5 million to these companies, and, along with our investors, are helping this huge number of mid‐sized companies to grow and thrive.
1 Small and Medium Enterprises
2 Bank of England, “Credit Conditions Survey ‐ 2018 Q4” as of January 2019
4 Peer‐to‐Peer Finance Association, “UK Peer‐to‐Peer Lending Data reflects continued maturity of the sector during 2018” as of 06/03/2019
5 UK Finance, “SME finance in the UK: past, present and future” as of December 2018
6 BNP Paribas Asset Management, “BNP Paribas UK SME Alternative Financing Fund 1” as of February 2019
7 British Business Bank, “Equity Crowdfunding in the UK: Evidence from the Equity Tracker” as of March 2014
Unless otherwise stated, all facts and figures come from the Department for Business, Energy & Industrial Strategy 2018 statistical release: Business population estimates for the UK and region