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TheCityUK today announces the launch of its major piece of research on alternative finance, focusing on SMEs and mid-market companies. This latest report, which is a follow up of TheCityUK’s 2012 Report – SME Financing: Impact of Regulation and the Eurozone Crisis” - reviews current developments and trends in alternative financing for smaller and mid-market companies, across Europe.
With 80% of financing in the UK and Europe provided by traditional bank financing, the report suggests that growth in alternative lending could help to increase resilience in the financial system and the wider economy, by diversifying the sources of finance available to companies and helping to support financial stability.
The report launched today (3 October) at the House of Lords at a roundtable for senior policymakers and industry representatives, hosted by Baroness Kramer, highlights the critical role of SMEs and mid-market companies to the UK recovery.
In addition to the UK, the report reviews financing of SMEs and mid-market companies in other European countries including Germany, France and Spain to reveal best practice across the EU. It assesses in depth, the potential of alternative financing to have a substantial impact in driving economic growth across Europe. Continental versions of the report will be launched at forthcoming events in Frankfurt and Brussels.
The report also looks at how these alternative sources of finance might close the “funding gap”, given current constraints on traditional bank lenders.
Chris Cummings, Chief Executive at TheCityUK, said: “With the European economy needing to generate fresh growth, it is imperative that smaller and mid-market companies receive the funding they need to help drive economic recovery. SMEs are critical to the future health of the EU, accounting for 99.8% of companies by number and over 66% of the region’s employment. Given current constraints on lending, it is vital to European businesses that alternative financing solutions come to the fore to complement mainstream banking lending. It is clear that alternative finance has an increasingly important role to play in financing the physical economy, throughout Europe.
“Closing the funding gap for smaller and mid-market companies will require the establishment of a regulatory level playing field for alternative financing, recognising its value to SMEs and mid-market firms, alongside bank finance. This in turn requires the normalisation of banking markets, including addressing the impact of provision of cheap liquidity by central banks.
“Traditional bank financing remains a major source of funding for UK companies, accounting for nearly 80% of real economy. Any sustained recovery will need to ensure that this pillar of lending stands tall. By way of contrast, in the USA, bank financing accounts for just 20% of real economy funding, with the bulk provided by non-banks and capital markets.
“Recent Bank of England figures, which show a drop in SME lending, demonstrate that more needs to be done to turn these emerging trends into action. Banks and alternative sources should be viewed as complementary sources of funding. We want businesses to be able to draw on a combination of these different sources to match their particular needs at different stages in their growth. Our roundtable today brings government and market participants together to look at ways we can make the insights of this report a reality.”
The report highlights the need for:
• the development of a UK private placement market for mid-market companies and SMEs to enable it to fill a gap in the UK’s market capabilities;
• the re-opening of SME loan securitisation markets as a mechanism to increase funding for smaller and mid-market companies;
• the establishment of an institutional market in untranched whole loan conduits;
• the encouragement of credit rating services for mid-market companies; and,
• the provision of a credit information exchange for SMEs and mid-market companies.
Key opportunities for encouraging the use of alternative finance in the UK include:-
Private placements: The report pinpoints that in comparison to the US and Germany where the market is well developed and in France where it is growing rapidly, the UK has a relatively undeveloped private placement sector. Whilst the UK Government has fostered the private placement space through its Business Finance Partnership, the absolute amount of private placement funding available is still small, relative to other countries, with UK companies typically going to the US for private placement funding. The report calls for stronger involvement in UK private placement financing by institutional investors, in line with other countries, to grow this market in the UK.
Securitisation markets: The report identifies that the opening of securitisation markets for SME loans has the potential to bring significant amounts of capital markets funding to the real economy. However it also calls for a level regulatory playing field in bank lending and for the impacts on central bank liquidity to be addressed, so that the foundations for the recovery of securitisation markets can be laid.
Credit information: The research also shows that enhancing the availability of credit information on SMEs and mid-market companies is a vital component to alternative funding, and will help to overcome the information gap that is a clear barrier to the rapid growth of this sector.
To learn more about reports produced by TheCityUK, including its latest UK Competitiveness Tracker, please go to https://www.thecityuk.com/research/our-work/reports-list/.
