Buying a business – how accessible is bank finance?
Last autumn’s market turmoil and the subsequent 14 consecutive base rate rises by the Bank of England have dramatically changed the commercial lending landscape compared to 12 months ago.
So, if you’re considering buying or expanding a business, how likely will you get bank finance? Here’s how the UK bank lending market is currently looking:
Lenders are still lending
Most banks still have an appetite to lend to small businesses but some high-street lenders have become more risk-averse, particularly if commercial lending is not their core activity. The upshot of this is that some banks are providing lower loans-to-value and higher minimum loan sizes.
The latest UK Finance Business Finance Review shows gross lending by the main high street banks remained subdued in Q2. Gross lending to SMEs in Q2 was £3.6 billion, down from £3.7 billion in Q1 and £5.1 billion in 2021.
The Bank of England estimates indicate that whole market gross lending in the first half of 2023 was 12% lower than the previous six-month period.
Borrowing costs are higher
Interest rate rises mean the cost of borrowing has gone up. Lenders usually calculate how much they will lend to a business based of its turnover and profit. Borrowers must demonstrate they can service the interest, which is then stress tested. As the cost of servicing the interest has gone up, the amount a lender is now willing to lend to a business is less than it was before the rate rises.
Higher interest rates make finance less affordable, leaving some businesses unable to borrow the full funds they need. More borrowers are choosing not to approach the high street banks for funding, favouring challenger banks instead. Other forms of finance, such as bridging or short-term financing options, are also proving popular. There are even lenders in the marketplace who can provide finance against invoices (known as invoice finance), or card sales (merchant cash advances).
Recovery Loan Scheme
The Recovery Loan Scheme is a Government backed scheme which supports banks lending finance to trading businesses which don’t necessarily have security, by providing loans which are backed by the Government. It has proven to be a useful tool for trading businesses to get finance which they might not have achieved otherwise.
Although the level of interest rates might seem to paint a gloomy picture, the latest decision to hold rates by the Bank of England is creating positivity and confidence in the lending market.
Also, there are still plenty of finance options available to businesses. The key to a successful funding application is approaching the right lender and preparing a compelling application.
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