Since the global financial crisis, the financial services sector has seen the significant growth of non-bank specialist lenders gaining market share from traditional high street banks. This has brought more diversity, competition and opportunity to the marketplace in a variety of areas, especially when it comes to small business funding. The reduction in bank lending to SMEs was caused by several factors, such as a stricter regulatory environment, increased risk aversion, increased cost of credit, changes in bank strategy, and use of legacy systems impacting customer experience.

Although the trend has continued since 2020, the pandemic did somewhat increase access to funding with the introduction of government guaranteed loans, administered by the British Business Bank (“BBB”). Under this scheme, the government provided a guarantee of up to 80% of the value of loans made by accredited banks and non-bank lenders to help stimulate lending to businesses impacted by the pandemic. This led to a temporary increase in funding from high street banks to SMEs. However, the general trajectory of banks retrenching from the SME market is expected to remain.

Nevertheless, the BBB schemes played an important role in fostering the growing role of non-bank lenders in supporting SMEs, by providing competitive funding, guarantees or facilitating alternative lenders access the capital markets. Overall, this has contributed greatly to levelling the playing field between banks and non-bank lenders.

In a speech in 2021, Isabel Schnabel, Member of the Executive Board of the ECB told the Annual Congress of the European Economic Association:

“Non-bank financial intermediaries now make up a much larger share of the financial system than they did in the early years of our common currency. Likewise, a growing number of firms resort to market finance to satisfy their demand for credit.”

The importance of the specialist lender sector

While there are many different facets to this evolution, its emergence has been of commercial importance to the SME funding landscape and is a space that’s continued to gain both legitimacy and relevance. With benefits ranging from more bespoke financing structures to processes that are better geared towards the specifics of businesses and their needs, non-banks have expanded both in terms of opportunity and popularity.

As a case in point, despite the macroeconomic headwinds of the last two years, the role of non-bank specialist lenders has become a vital tool for businesses, supporting the development of a competitive commercial environment and facilitating enterprise that’s critical for economic development. The opportunities this sector presents has been particularly welcome in scenarios where traditional banks have pulled back.

UK Finance wrote: “UK policymakers should arguably be commended for the steps they have taken to build a competitive and open environment for the provision of credit to businesses and consumers over recent years. Their pragmatic approach has enabled a range of players and business types to operate within the UK – often meaning a greater range of options and more competitive prices for those looking for such services. A vital part of this is the non-bank specialist lending sector (NBSLS).”

The scale of uptake in non-bank specialist funding

In terms of the scale of that change, at the end of 2023, the Fintech Times wrote:

“40 percent of UK small and medium-sized businesses (SMEs) have found it easier to gain financing from alternative lenders”. They added: “Alternative finance options increasingly offer a lifeline for UK SMEs, with seven in ten (70 percent) admitting they wouldn’t have survived the current cost of living crisis if it wasn’t for these types of lenders.”

A diverse space that’s particularly geared to serving SMEs, it’s worth remembering that SMEs account for 99.9% of the business population in the UK and around 53% of turnover in the private sector. With that in mind, UK Finance wrote: “It is estimated that about 30 percent of all SME finance comes from non-banks.”

Meanwhile, Alternative Credit Investor says: “Alternative lenders and private debt funds have filled the gap left in the UK small business finance market after banks scaled back their lending, according to the British Business Bank. The state development bank’s small business finance markets 2023/24 report noted that alternative finance providers ‘are now very much part of the mainstream for many smaller businesses looking to borrow and are able to reach many parts of the market more traditional lenders cannot or do not wish to reach’.”

Investment opportunities in a growing market

LGB has been at the forefront of these developments, as they are relevant to both investors and corporate clients. With a bird’s-eye view on both ends of the market, part of our role is to provide solutions for non-bank lenders to establish themselves and grow their businesses. We have seen fast-growing and disruptive lenders, such as Simply Asset Finance and Rivers Finance Group, go from strength to strength by presenting compelling and innovative financing solutions to the SME market.

Simply Asset Finance

Simply Asset Finance specialises in hard asset finance for UK SMEs, and in 2020 established an MTN programme which has grown to £65 million to date. As of the first half of 2024, the group had provided c.£1.4bn of asset finance since inception, most of which has been funded on Simply’s own balance sheet with the remainder brokered out to its funder panel. Simply ranked in the FT1000 fastest growing businesses in 2022 and 2023.

Rivers Finance Group

Meanwhile, Rivers Finance Group is a London-based asset leasing and corporate loans business, also ranking in the FT1000 fastest growing businesses for four consecutive years from 2017 to 2020. They established an initial £6 million programme with us in January 2016, and thanks to growing demand they have continued to fundraise with LGB with multiple rounds since, and the programme has increased to a £40 million limit. In many instances, investors have elected to reinvest with the company as a result of its progress. This year, the company celebrated the 10 year anniversary of its collaboration with LGB.

LGB Capital Markets Director, Fergus Randall, said: “Investors often ask us whether the non-bank lending market is saturated, given the increased number of entrants over the last 15 years. However, it is worth noting that pre 2008 the large high-street banks did the vast majority of SME lending, leaving less opportunity for new players. Since then, a combination of new regulations, and a lack of appetite amongst traditional banks has created a prime market for new businesses to emerge and serve an area of the market with good credit standing where there was high demand. As such, many non-bank lenders are simply lending to businesses that were previously serviced by traditional banks that have now retrenched. This should give investors’ confidence that there are ongoing opportunities in this space for all involved. Yes, for those borrowing, these non-bank lenders can represent a slightly higher cost of capital, but they also provide an option to access funding that wasn’t previously available, fuelling enterprise and allowing smaller businesses to thrive. The sector is also now reaching a level of maturity that further galvanises its success, with the first wave of non-bank lenders becoming acquisition targets for bigger banks. Notably, Allica acquired the bridging lender Tuscan Capital this year.”

LGB is in a unique position for introducing investors to potential opportunities in this burgeoning market, as well as to provide businesses with opportunities to raise capital. If you would like to find out more, you can explore our investment approach and our fundraising solutions, or contact us for further information.