Why SME lending is the big battle for the future of business banking


Early last year established hoteliers Simon Rhatigan and Simon Kershaw had a great idea for a new hotel concept and went out to raise about £3 million in funding to get started.

"Initially we looked at venture capital but we didn't want to do lots of work and end up giving a lot of it away," Kershaw told Computerworld UK. "Then we started talking to the high-street banks and specialist providers and it quickly became obvious that, quite frankly, anything under £2 million wouldn't happen and anything over £10 million was deemed as a major investment, so we fell between two stools, as it were."

This was when they were introduced to OakNorth, a relative newcomer lender established in 2015 which recently raised $440 million in funding from the SoftBank Vision Fund - putting its mission to "help the UK's growth businesses and entrepreneurs reach their potential by providing them with bespoke, no-nonsense debt finance solutions" on the map.

Where the established banks would try and shoehorn the two Simons' project into their categories, OakNorth took "a whole new approach, they looked at the project and people and feasibility to outline how to fund us from A to B," Kershaw explained. "They knew the sector and what we needed to get open and trading and how to structure the funding around what was right for the business."

With that money secured in October, the pair purchased the Mount hotel in Scarborough to be the first in its chain of Bike and Boot Inns, a new mid-range countryside leisure hotel concept aimed at cyclists and walkers.

Rhatigan made his name in five star accommodation, running Le Manor aux Quat' Saisons in the 90s and the award-winning Faversham Arms in the noughties. Now, alongside Kershaw, the pair are looking to build the Bike and Boots brand across the UK, with another site in the Peak District already lined up.

It's safe to say Kershaw has been happy with the OakNorth approach, one which leverages technology to better understand the risk of its investment, leading to zero defaults in its four years of lending so far.

"It took us six years to find OakNorth, which tells you how tough it is out there," Kershaw said. "We lost time and have put a number of businesses in touch with OakNorth which are having the same problems we did, and these are established businesses going to high street banks that just said they aren't interested, and that is really limiting things for small businesses."

This is just one of many stories of small businesses struggling to access the right sort of funding they need in the wake of the 2008 financial crisis. Since then lending to small-to-medium-sized enterprises (SMEs) in the UK has shrunk to unprecedented levels, with the value of bank loans issued to SMEs through the government's small business lending scheme falling to just £55.6 million in the last quarter of 2018, down 78 percent from its peak of £255 million in 2009.

As the big banks have looked to de-risk their balance sheets and shore up their capital in the wake of the crash they have rapidly receded from lending to SMEs and gone about imposing stricter and stricter requirements upon them to get access to cash.

While this may be a source of frustration for many business owners, it also provided a funding vacuum and subsequent opportunity for innovative new providers, and the rest of the industry is starting to sit up and take notice.

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