Commercial Broker (NACFB Magazine) April 2023

Norman’s Note

Managing Director | NACFB

There’s a reason I don’t drive the same car I did in the seventies; time and technology move on. It’s not until you step into a car made in 1974 that you realise just how far we’ve come. It’s the same with legislation really, in particular, ‘74’s Consumer Credit Act. Much like a vintage motor, whilst you can amend and adapt legislation, if it’s no longer fit for purpose, it becomes apparent quickly.

Why then should the commercial finance community operate under primary legislation designed for a very different era? That’s precisely the question the UK Government asked itself ahead of its announced plans to reform the CCA. Such vaulting ambition is timely but incredibly complex and likely to unfold over many years. I step through some of my initial thinking in this month’s cover feature.

Elsewhere at your trade body, and after last year’s sell-out scorcher, the NACFB Summer Party is back. Returning to the London headquarters of the Honourable Artillery Company (HAC), this year’s bash takes place on Friday 7th July. Discounted early bird tickets are now available to all NACFB Member brokers and tickets will go on general sale to NACFB Patrons and Partners on Monday 1st May.

The NACFB Summer Party provides the ideal counterpoint to the NACFB Expo – which incidentally has now sold out to all exhibitors. Whilst the NACFB Expo sees brokers attend firmly with their business hat on, those broking hats are swapped for a more relaxed Panama-style accompaniment as more social engagements take order of the day. In fact, you’re far more likely to be asked about your summer holiday plans than commercial product offerings, and we like it that way.

So, enjoy this month’s issue of Commercial Broker, and please continue to make use of all the Association’s support services and advice. We’re a proudly independent and broker-first organisation, and we’ll continue to champion our sector before all we encounter.

Norman Chambers

Association updates for April 2023

NACFB News

NACFB Summer Party –broker early bird tickets available now

After last year’s sell-out scorcher, the NACFB Summer Party is back –and the Association’s Members are exclusively among the first to be invited.

Returning to the London headquarters of the Honourable Artillery Company (HAC), this year’s bash takes place from 1pm on Friday 7th July. Discounted early bird tickets priced at £75+VAT are now available to all NACFB Member brokers and tickets will go on general sale to NACFB Patrons and Partners on Monday 1st May.

Commenting, managing director Norman Chambers, said: “First and foremost, we’re in a people industry and whilst the NACFB Expo is very much focused on business, our Summer Party is a purely social event, aimed at strengthening personal relationships and – quite simply – having fun.”

Building on the success of last year’s inaugural event which celebrated the Association’s 30th birthday, this year the party returns with a French Riviera twist to enable Members, Patrons, and Partners to forge closer ties in a relaxed setting. Find out more and secure your place online at nacfbsummerparty.co.uk

Minister responds to NACFB’s calls for intervention

City Minister Andrew Griffith has responded to the NACFB’s open letter that called for the Government to urgently intervene with two separate regulatory frameworks in a bid to prevent a reduction in SME lending. In response to concerns regarding further Basel III implementation, the Minister outlined that officials had assured him: “…the PRA are looking at your concerns on secured business loans closely.”

Last month, the NACFB joined wider calls for a greater examination of the unintended consequences that the framework will bring and had encouraged the Bank of England and the PRA to show their workings by releasing supporting data that justifies their continued approach ahead of its implementation.

In response to the NACFB’s call for greater Consumer Duty clarity to avoid a further muddying of the waters, the Minister encouraged the trade body to continue engaging constructively with the FCA “…so that they understand firms’ plans and progress” in implementing the Duty. The Ministerial response followed the publication of new research on Basel III’s impact from consultants Oxera, to which the NACFB provided foreword remarks.

The untapped opportunity of RLS

David Holdstock Government Lending Scheme Manager Allica Bank

The Recovery Loan Scheme (RLS) represents a huge opportunity for small businesses in the UK. By guaranteeing 70% of each facility approved for the scheme, the British Business Bank is enabling lenders to offer finance to businesses they wouldn’t otherwise have been able to.

However, at a time when businesses need all the support they can get, misperceptions about the scheme have meant that some businesses might so far have missed the opportunity to benefit.

There are many reasons for this, but I think one of the key issues is that understanding of the scheme – especially in the shadow of the COVID-19 pandemic – has led to many businesses thinking RLS-backed loans are not for them.

A perception problem

Despite the name, the Recovery Loan Scheme is not just for lenders to help businesses recover from the pandemic. Indeed, the British Business Bank recently removed all mention of COVID from its requirements under which lenders assess who is eligible for an RLS facility, and has instead geared the scheme around helping banks drive business growth.

For example, here at Allica, we have supported businesses with loans supported by the RLS to:

• improve their cashflow position with a five-year, interest-only commercial mortgage;

• fund M&A activity;

• refinance owned assets;

• refinance debt, including a Coronavirus Business Interruption Loan Scheme (CBILS) loan.

These were all deals Allica would not otherwise have been able to support under our existing credit appetite (if we can lend under our existing policy, we would do so, rather than call on the scheme).

So, as you can see, there are all sorts of use-cases for the RLS and it can often be the difference between a lender offering finance and not.

From talking to brokers and business owners, it’s clear, too, that many think being offered an RLS-backed loan by a lender will require a lot of work. This isn’t the case. There are a few forms that need filling in, but much of the onus is on the lender.

Tapping into RLS

I encourage brokers to keep the opportunity for lenders to call on the Recovery Loan Scheme in the front of their minds when talking to their clients about their options. Where they may previously have struggled to find an affordable lender, there is now a lot of opportunity to source finance where perhaps there wasn’t before.

The British Business Bank is keen for us to support the growth ambitions of viable businesses. Let’s make sure we use it.

Industry News

1. Mortgage lending falls but approvals increase

Mortgage approvals have improved for the first time since August, with the Bank of England’s Money and Credit report showing net mortgage approvals for house purchases increased to 43,500 in February from 39,600 in January. However, lending fell to its lowest level since April 2016, excluding the pandemic. The report shows that homeowners borrowed £700 million in February, down from £2 billion in January. Martin Beck, chief economic adviser to the EY Item Club said: “The worst may be in the past.”

2. Vickers warns against easing financial sector regulations

John Vickers, the former chair of the Independent Commission on Banking, has warned the Government against relaxing financial sector regulations at a time when banks are facing severe pressure. Referring to the Edinburgh Reforms, which will repeal certain pieces of retained EU law, Mr Vickers, who is sceptical of the toughness of the stress tests said: “Current events should put an end to any thoughts of rolling things back.” The proposals include relaxing ring-fencing rules and scrapping the cap on bankers’ bonuses.

3. March grocery price inflation hits record high

Shop price inflation climbed to a record high in March, with the British Retail Consortium (BRC)-NielsenIQ index showing that prices are 8.9% higher than they were a year ago. This is up from February’s 8.4% increase. Overall food inflation accelerated to 15%, up from 14.5% last month, while the price of fresh food was 17% higher than March 2022, although these are expected to ease. Inflation on items other than food also reached a new record of 5.9%, up from 5.3% in February.

4. Half of households worry over mortgage and rent

Almost half of UK households are worried about keeping up with their rent and mortgage payments over the next year, research for the pensions and life insurance group Legal & General suggests. Its Rebuilding Britain Index found 47% of households are concerned about not being able to keep up with rent and mortgage payments. It also reveals that inequalities have worsened over the past year as the poorest households have been hardest hit by rampant inflation.

5. BoE will keep hiking rates if inflation persists

Governor Andrew Bailey says the Bank of England will be forced to increase interest rates again if inflation does not fall fast enough in response to previous rate rises. He said the Bank is still watching for signs of persistent inflationary pressures in case further monetary tightening is required. Suggesting that future hikes in interest rates will be in response to higher-than-expected inflation figures, Mr Bailey said any future rate rises “will be firmly anchored in the emerging evidence.”

6. Ministers urged to boost deposit protection

In the wake of the collapse of Silicon Valley Bank (SVB), the Government has been urged to give companies more deposit protection amid turmoil in the banking sector. Many SVB UK customers had uninsured deposits, meaning they risked losing everything above the £85,000 that is safeguarded under the Financial Services Compensation Scheme. Will Wragg, co-chair of the All-Party Parliamentary Group on Fair Business Banking, said the SVB UK “fiasco” has revealed that a number of companies were exceeding their deposit protection limits.

7. Slashing energy support puts small firms at risk

The Federation of Small Businesses (FSB) has warned that 370,000 small businesses may have to retrench operations when support for energy bills is cut. Some 24% of small businesses are locked into energy contracts signed last year, and 28% of these may have to shrink, restructure or close their businesses when the current support package ends, the FSB said. The recentfall in gas prices won’t be reflected in long-term contracts until they are renewed later this year.

8. OBR chief in cost-of-living warning

Office for Budget Responsibility (OBR) chair Richard Hughes has warned that real living standards may not improve until the “late 2020s.” He told the BBC’s Sunday with Laura Kuenssberg that the impact of Brexit on the economy is of the same “magnitude” as the pandemic and energy price crisis, saying GDP will be 4% smaller than if the country had stayed in the EU. He also said there was a “huge amount of uncertainty around the outlook for inflation.”

9. Cost-of-living crisis worse than lockdowns for SMEs

Research by Nucleus Commercial Finance has found that most SMEs find the cost-of-living crisis more of a burden than the pandemic lockdowns. Nucleus chief executive Chirag Shah said: “The scale of the current economic challenge facing UK SMEs vastly exceeds that of the pandemic, according to those at the coalface. This is forcing businesses across the UK to reassess their investment and growth strategies, closely examine their overheads, and, more often than not, lean on additional finance just to keep the lights on.”

10. Think-tank: SFO may need to be abolished

A report from the Institute of Economic Affairs think-tank suggests that the Serious Fraud Office may need to be abolished due to a history of failures and “unprofessional behaviour.” The report says the SFO has been “responsible for a series of expensive and high-profile failed prosecutions, unlawful prosecutions and breaches of the civil service code.” It alleges that the SFO has made serious allegations and dedicated significant taxpayer resources to investigations but then made errors and ultimately been forced to drop cases.

We’ve made commercial finance more accessible.

Membership News

NatWest: UK consumers plan to cut retail and leisure spend

New research published by NatWest and Retail Economics has found that the uncertain economic backdrop continues to have an impact on retail and leisure spending in 2023.

The NACFB Patron’s 2023 retail and leisure outlook report reveals many shoppers have cut back spending on essentials such as food and drink by trading down to cheaper alternatives, and many are cancelling spending altogether on discretionary purchases such as holidays, takeaways, and homeware. Over a quarter of consumers – 28% – plan to cut all spending on homeware, whilst 27% plan to stop spending on takeaways. The report says that these consumer motivations will be important for businesses to address in 2023.

David Scott, head of consumer industries, NatWest said: “It feels like a long time since we have operated in any sort of normality. Market events have been unprecedented and for many the focus has been on simply surviving. Although some confidence appears to have been restored in recent weeks, pressure on profits is expected to remain intense in 2023.”

Richard Lim, CEO at Retail Economics added: “As the retail landscape constantly evolves, retailer brands must be prepared to adapt to changes and embrace new technologies to stay ahead of the competition.”

Time Finance: SMEs owed an average of £250k in late payments

New data from Time Finance has revealed the worsening challenge of late payment debt as it finds SMEs are owed on average a quarter of a million pounds in outstanding invoices.

In a survey, the NACFB Patron uncovered that one in three businesses are forced to wait between 60 and 120 days for invoices to be paid by their customers. It is a problem that continues to significantly hold businesses back from realising their investment plans, claims Time Finance.

Commenting, Phil Chesham, managing director of invoice finance said: “The problem with late payment is how much it can limit success; a business can’t access the money it needs to pay its bills, or even its staff, but it also lacks headroom to invest in innovation or react quickly to opportunities. This then has a knock-on effect on a business’ supply chain, who, when also not paid, struggle to meet their own overheads or finance growth ambitions.”

He said that £250,000 was a significant figure to be locked away unutilised. Stressing the importance of supporting UK businesses, the lender is sharing its new data following news that business insolvencies reached a 13-year high in 2022 with 22,000 businesses forced to fold.

Home sweet homebuilding

the UK’s SME housebuilders

Sam Hudson Credit and Operations Director Pluto Finance

Areal estate lending business, Pluto Finance has lent in excess of £3 billion in bridging, development and investment loans since inception in 2011. In fact, we are proud to have enabled the delivery of more than 10,000 new homes in that time.

Now, we plan to build upon that milestone with the help of NACFB Members. Our lending target for this year is £600 million across all three product ranges.

With a primary focus on residential property development, we are keen to engage with brokers who have medium-sized housebuilder clients. We have a variety of products that will appeal to these borrowers including those looking for finance to Build to Rent (BTR) and develop Purpose Built Student Accommodation (PBSA). We are also working on an ESG (environmental, social and governance) offering, so watch this space…

The opportunity

Whilst we know that the UK housing crisis is not going to be solved anytime soon, we believe that there is a real opportunity to support

housebuilders with finance that will empower them to bring sites forward more quickly. As an agile lender with good capital backing from a range of institutions, as well as being part-owned by the UK’s largest private pension fund USS, we are well placed to lend more. Our current track record of lending is in the £5 million to £25 million bracket, but we are willing and able to look at finance above this volume, up to around £125 million for example.

As a specialist property lender, Pluto Finance is not constrained by waves of criteria. We like to think of ourselves as flexible and commercial in our decision-making process which means we can turn around finance fast. We have the backing of a strong suite of investors including pension funds, insurers, and large global financial institutions. Since 2021 we have been part-owned by the Universities Superannuation Scheme, the UK’s largest private sector pension scheme which has over £80 billion in assets under management. Working with patient, long-term capital allows us to put both broker and borrower relationships at the heart of our business.

In addition to residential property, we are also keen to take on commercial opportunities, such as new, sustainable office developments in city centres although this will be on a case-by-case basis.

More than half of our borrowers are repeat clients with whom we have taken the time to develop strong relationships. We are keen to take the same approach with NACFB Members so, from the very first point of contact, brokers engage with our decision-makers and senior staff to ensure the fastest and most efficient response. Our aim is to provide straight-forward loan offerings that optimise on

Supporting

leverage and price, and we believe in finding a solution that fits the client’s needs rather than fitting them into a standard product.

The application process

We appreciate that a quick response is important when assessing funding options, so we endeavour to provide a substantial reply to all applications within 24 hours. In this time one of our specialist lending directors will have reviewed the application along with a member of our credit team so that we can confidently offer credit-backed indicative terms which are unlikely to be diluted as due diligence progresses.

Clients are at the heart of what we do so we like to meet them on site as early as possible in the process and we’re keen to invite the broker too. COVID has taught us to be flexible with our requirements so we also conduct initial meetings via video call if required.

Our credit operations team utilises the latest analytical property

tools and collates the information received in the loan application to present the full proposal to our credit committee (which comprises the Pluto leadership team and head of credit). We hold multiple credit meetings each week to ensure that brokers can relay a speedy decision to the client. The timing to draw down can vary depending on the complexity of a deal but we can transact as quickly as two weeks from credit approval with an average of four weeks for bridging loans and eight weeks for development facilities.

Looking forward

Inflation is slowing so we hope that interest rates will settle sooner than expected. I think we’ll see a lot of refinancing and servicing of debt to avoid projects being shelved. I also expect that alternative lenders, like Pluto, will pick up the gauntlet on financing new developments for SME housebuilders. BTR will continue to forge ahead but perhaps at a lesser rate in the city centres, with greater focus on suburban single-family homes (SFH) and schemes that build in ESG and coworking criteria.

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We believe in finding a solution that fits the client’s needs rather than fitting them into a standard product

Is this how the cookies crumble?

What to expect from new data protection provisions

Adam Matthews Compliance Officer NACFB

Navigating the internet in the 21st century can be a frustrating task; irritatingly forgetful cookies policies and increasingly intrusive pop-ups. This simply isn’t the promised land many hoped for in a post-GDPR world.

But is hope on the horizon? Cutting down on pointless paperwork and reducing annoying browser cookie pop-ups, all while saving the UK economy billions, it’s an undeniably catchy strap line for the government’s proposed Data Protection and Digital Information Bill (DPDI Bill).

Taking the biscuit

Small businesses and consumers alike will require no formal introduction to the UK’s General Data Protection Regulation, with many receiving daily reminders in the form of cookie pop-ups and privacy notices. Whilst the law has undoubtedly given the individual greater power and protection over their data, for some it has become a nuisance.

In the post-Brexit era, the UK government now looks to amend existing data protection laws to provide legislation tailored to the UK economy. The government’s DPDI Bill, codesigned with key industry and privacy partners, looks to retain the core principles of existing data regulations whilst removing red tape and associated costs to businesses.

Although only time will tell whether the DPDI Bill is a recipe for success, the government has set out the benefits it expects businesses to see:

· A clear and simple framework that will not be difficult or costly for businesses to implement;

Increased flexibility for businesses to comply with the new laws;

· Continued data adequacy with the European Union;

· Lower volumes of paperwork required to evidence adherence to the regulation;

· Increased international trade without higher costs for businesses who are already compliant;

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Small businesses will be pleased to hear that the DPDI Bill looks to reduce the amount of ‘unnecessary paperwork’

· Greater assurances to businesses about when personal data can be processed without consent;

· Improved confidence in AI technologies by making the rules surrounding automated decision-making clearer.

The government believes these are the key ingredients to unlocking £4.7 billion in savings for the UK economy over the next ten years.

How might smaller businesses benefit?

Businesses of all sizes will undoubtedly be affected by the proposed changes, but none stand to benefit as much from the government’s ‘common-sense-led’ approach than small businesses. Existing data regulation does not allow small businesses flexibility when managing the risks they face, and as such, the weight felt to comply can often feel disproportionate.

Small businesses will be pleased to hear that the DPDI Bill looks to reduce the amount of ‘unnecessary paperwork’. The proposal only requires those whose data handling poses a high-risk to individual’s rights and freedoms to retain processing records.

The government seeks to clarify the definition of scientific research, affording commercial organisations the same freedoms as academics. Small businesses will benefit from research and innovation made more attractive by lower costs.

As automation and AI technologies become more prevalent in our day to day lives, the DPDI Bill looks to increase public and business confidence. The proposal clarifies the need for safeguards with

automated decision-making and ensures individuals can challenge and seek human review where decisions may be inaccurate or harmful. This will allow a smoother transition for small businesses who wish to take advantage of these technologies.

The government looks to offer assurances to businesses who share personal data overseas. Small businesses whose data transfer processes meet existing requirements will not be expected to make any changes or pay more costs to evidence that they comply.

The proof is in the pudding

Data-driven trade is key to the success of the UK economy, equating to 85% of the UK’s total service exports and generating £259 billion in 2021 alone. It therefore comes as no surprise that the government wants to stray from EU regulation and take advantage of its ability to create bespoke legislation for the UK economy. Whilst there may be benefits to businesses, only time will tell whether the DPDI Bill will foster the growth and innovation forecasted, or if the chance to deviate from EU regulation with little disruption was simply too good an opportunity to miss.

The NACFB is committed to keeping all Members up to date and providing resources to assist with any changes in regulation. More information on existing data protection laws can be found via the Association’s training portal with modules tailored to all aspects of UK GDPR. Members also have access to a full template document library which provides a suite of documents which can be fully adapted and personalised. Should Members have any specific questions or require more detailed help, please contact the compliance team at compliance@nacfb.org.uk

Only time will tell whether the DPDI Bill will foster the growth and innovation forecasted, or if the chance to deviate from EU regulation with little disruption was simply too good an opportunity to miss

Brian Berry Chief Executive Federation of Master Builders

The Federation of Master Builders (FMB) is the largest trade association in the UK construction industry representing the interests of small and medium-sized building companies and lobbying for members at both national and local levels. We asked chief executive Brian Berry to share some of the challenges currently facing the industry and its members.

Q Building futures

For many years the construction industry has suffered workforce shortages, why is that?

The lack of skilled labour is a result of structural changes within the construction industry with fewer employers taking on apprentices. Until Brexit it was easier and often cheaper for employers to rely on EU labour. That has now changed adding to an already difficult situation. In the lead up to the Spring Budget, the FMB called on the Government to ease immigration restrictions for skilled labour which the Government responded to by allowing certain trades such as bricklayers and carpenters to be added to the Shortage of Occupations List. Critically if the skills crisis is to be addressed

more investment is needed for vocational training and more needs to be done to encourage school leavers to come into the construction industry.

The FMBʼs Q4 2022 State of Trade report suggests that small house builders are most under threat; whatʼs hindering their ability to build homes?

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The availability and viability of land as well as the cumbersome planning system are not only delaying new homes but are leaving SME house builders out of pocket.

How are the industrial and commercial construction sectors fairing?

They have been impacted by an increase in material prices and labour shortages but faired relatively well in terms of workload throughout 2022. In the last quarter of 2022, the sector saw a significant downturn in enquiries. Cost of living pressures and inflation are affecting the smallest building firms the most.

What could lenders do to support smaller businesses in the construction industry?

Small house builders often struggle to obtain financing and this is regularly identified as a top barrier to delivering

new homes in the FMB annual House Builders’ Survey. This can be because the barriers to obtain funding are complex. Also, planning permission is often required before funding can be provided, but as smaller builders are cash flow reliant, being stuck in the planning system, sometimes for over a year can really hit bottom lines.

What measures need to be put in place to address the workforce shortages and how long might we have to wait for them to take effect?

We need both the Government and the construction industry to work together to tackle the issue. We need to see more initiatives aimed at improving the image of the construction industry to help make a career in construction more appealing. We also need to work towards professionalising the industry, for example through a licensing scheme, so that it is seen as a long-term, reputable career path.

Whatʼs the outlook for the construction industry and SME builders this year?

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The need to retrofit our existing housing stock as well as the urgent need to build more homes will sustain the SME building industry over the coming years. To succeed the economy needs to be managedsensitively to help both consumers and SME building companies have the confidence to invest.

The road to recovery

Preventing viable businesses from going under

Phil Chesham Managing Director of Invoice Finance Time Finance

As an intermediary, you’ll be aware of the many challenges that businesses face on a daily basis, from managing cash flow to keeping up in competitive markets and dealing with disruption. Running a successful business can be a daunting task at the best of times, but when high inflation, soaring costs, supply chain challenges and weakening consumer demand are thrown into the mix, the need for tailored financial support becomes greater than ever.

The impact of the last few years has not been insignificant. January saw insolvencies reach a 13-year high and around 22,000 businesses were forced to fold in 2022 alone. With increased pressure on business’ cash flow making insolvency an inevitable outcome of an unsustainable situation, we look at the greatest challenges facing firms right now and how solutions like invoice finance can be the key to saving viable businesses in 2023.

The late payment cycle

Poor cash flow isn’t a new problem. It may have worsened as a result of rising costs, but late payments from customers have long acted as a barrier for businesses. Acting as a vicious cycle, it sees one business owed thousands in outstanding invoices, which in-turn leaves it struggling to pay its own suppliers, bills and in some serious cases, its own employees. The domino effect continues down the chain, and on and on the problem continues as more businesses are impacted.

But what does the extent of late payment look like and why is it forcing viable businesses to go under? Well, from our own research,

many businesses are owed on average £250,000 in unpaid invoices and up to 70% wait longer than 60 days for payment. That’s too many businesses in need of working capital, headroom, and freedom to grow.

Across the UK, this figure is much more astounding, with estimations that late payments amount to £23.4 billion. Let’s just think about the potential that money could unlock if it was paid to those businesses on time.

Looking beyond survival

An injection of finance can pay the bills and keep businesses afloat, but for firms to really recover and thrive, they need to look beyond short-term solutions. Issues like late payments and rising costs won’t go away overnight. Helping businesses to build resilience and headroom can take them from simply surviving, to thriving.

The role of the finance industry is as important as it’s ever been, giving business owners the financial freedom and tools needed to grow their capabilities and expand their earning potential. We know

“ Businesses are owed on average £250,000 in unpaid invoices and up to 70% wait longer than 60 days for payment

too well that by having a supportive funder and healthy margin of working capital, clients have the confidence to invest in people, innovate through new technologies, adapt, develop products and services, and break into new markets.

Unlocking capital through invoice finance

It’s important to be aware of the challenges facing businesses right now, and to help them to understand the support available. By doing so, we can help our clients make informed decisions about their financial future and ensure they succeed.

For a long time, invoice finance has been an ideal funding solution for helping businesses gain access to additional working capital, improve cash flow, and build in headroom for growth. But it’s a solution we see only growing in popularity, as demand for finance rises and businesses seek support for overcoming their immediate cash flow challenges and achieving long-term goals too.

With healthy funding lines that not only inject capital into the business, but grow alongside their operations, invoice finance continues to be a flexible and effective way for firms to manage their cash flow and stay competitive in today’s economy.

Support your growth with Time

Our funding solutions give your clients the confidence to achieve their business goals.

On the road again

Reforming legislation that has seen better days

Norman Chambers Managing Director NACFB

The year is 1974. Inflation threatens to spiral out of control, it reaches 11.3% in the USA and 17.2% in the UK as a global recession looms. A major US lender – Franklin National Bank – is declared insolvent and governments debate the use of nuclear energy to combat rising oil prices and uncertain supply. Proof – if ever it were needed – that whilst history might not repeat itself, it certainly does echo.

1974 also saw the UK introduce the Consumer Credit Act (CCA) with the aim of regulating the sector and providing greater borrower protection. Imagine purchasing a car in the mid-seventies. The ensuant years will see that vehicles undergo rounds of successive part changes and repairs by a series of different owners for various purposes. Consumer credit regulation is much the same and – just like with classic car maintenance – unpicking years of accumulated tinkering can be an expensive, arduous, and often tedious process. A complex series of spinning wheels within wheels.

Now however, there is simply too much mileage on the clock, too few of the original parts are present and there is a near universal acceptance that its best days are behind it. So, in June last year, the government announced its intention to reform the CCA. How did we get here, what exactly is at stake, and what can financial services firms expect from new legislation?

A classic of the era

The UK’s CCA was first introduced onto the statute book nearly fifty years ago with the aim of regulating consumer credit and providing greater protection to borrowers. The Act came about in response to

growing concerns that some unscrupulous lending practices were becoming increasingly prevalent in the 1960s and early 1970s.

Prior to the CCA, there was no comprehensive regulatory framework governing consumer credit in the UK. Lenders were largely free to set their own terms and conditions, which often included high interest rates, hidden fees, and unfair contract terms. A pre-CCA world was more likely to leave consumers vulnerable to exploitation and abuse, particularly those from disadvantaged backgrounds who had limited access to credit.

The CCA’s introduction sought to address these issues by introducing a range of protections for consumers. Among other things, the Act requires lenders to provide clear and concise information about the cost of credit, including the interest rate and fees. It also set out rules around the content and format of credit agreements and provides borrowers with a range of rights, including the right to cancel certain types of credit agreements.

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The rise of online lending platforms and other fintech solutions has created new regulatory gaps that the CCA does not effectively address

Keeping pace

The CCA regulates various forms of consumer credit, including credit cards, loans, and hire purchase agreements. However, the rise of digital lending and a greater innovation of financial products and services have created regulatory gaps that the CCA does not adequately address. Whilst the CCA has played a critical role in protecting consumers’ rights and ensuring fairer lending practices, it is now in need of significant changes to meet the challenges of the modern financial landscape.

The government has said that the existing regulatory landscape –which is made up of the CCA, subordinate legislation and FCA rules, and incorporates historic requirements under the EU Consumer Credit Directive – has become increasingly fragmented. It is “too complex and incoherent” as well as “costly for firms and difficult for consumers to understand”, and it “contains overlap that restricts optimal outcomes for consumers and business”. Whilst quite the set of declarations, the government should be praised for this acknowledgment and the NACFB hopes that such frank and honest introspection now forms a central tenet of the Act’s review, repositioning, and reform.

One of the key issues with the CCA is that it creates an uneven playing field between different types of financial service firms. The Act imposes a range of requirements and restrictions on lenders, but

these obligations do not apply equally to all lenders. For example, banks – high-street or otherwise – are not subject to the same level of regulation as other lenders, which has led to a disparity in the level of protection afforded to consumers. Furthermore, the CCA is not adequately equipped to address the challenges of the digital age. The rise of online lending platforms and other fintech solutions has created new regulatory gaps that the CCA does not effectively address. This has led to confusion and uncertainty for businesses and consumers alike.

Fundamentally, in its current form the CCA does not adequately protect the interests of commercial borrowers. The Act’s provisions are primarily geared towards protecting consumers, but many small and mediumsized businesses do not fall under this category. As a result, businesses could still potentially be left more exposed to dishonest lending practices and hidden fees.

The road ahead

But what can the industry expect in terms of reform? So far, we know that changes will be implemented via primary legislation, which will be brought forward “when parliamentary time allows”. There is a clear desire for the regime to be moved predominantly from legislation into FCA handbook rules and guidance, on the basis that this will make it less cumbersome and more agile.

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Whilst the CCA has played a critical role in protecting consumersʼ rights and ensuring fairer lending practices, it is now in need of significant changes to meet the challenges of the modern financial landscape

However, the government does not envisage simply lifting and shifting existing CCA provisions into FCA rules, instead it intends to recast them entirely, taking the opportunity to update and modernise the law. It expects the result to largely fall under FCA rules, guidance and principles providing effective and high levels of protection that achieve similar ends to existing legislation, but in a way that is more flexible, adaptable, and future proof. There have also been pledges to simplify ambiguous technical terms to make clear to consumers what protections they have – and make it easier and more cost-effective for businesses to comply with regulation.

It should also be noted that the FCA’s 2019 Retained Provisions Report on whether the repeal of CCA provisions would adversely affect the appropriate degree of protection for consumers did not assess the impact of other forms of consumer protection that will or could be introduced, such as the Consumer Duty and changes to the FCA’s rule-making powers, nor did it consider the potential opportunities made available by leaving the EU.

The Consumer Duty does not fully replicate all aspects of consumer protection found in the CCA, which provides some protection for borrowers under unregulated products, criminal and redress

sanctions, and unenforceability. However, the introduction of the Consumer Duty does mean that the context in which the CCA protections were originally written has significantly changed.

The government seems open to wholesale reform, including looking at whether the expansion of the FCA’s rule-making powers is possible or desirable to enable the transfer of provisions out of the CCA. In this context, it is mindful of both the Edinburgh reforms, which aim to empower financial regulators while enhancing their accountability, and the underpinning Consumer Duty principles.

Members of the NACFB originated £45 billion of small business loans in 2022 alone. Legislative changes that in any way threaten to hinder this route to market are monitored by the Association carefully. The nuances of intermediary-led business borrowing can be intricate, and the modern commercial broker has long since occupied a rare but privileged vantage point between borrower and lender. This position ensures the trade body is a uniquely well-placed authority to speak on the considerations and ramifications of any changes to the CCA. The Association will be watching developments to ensure that consideration of the full distribution chain found within commercial lending is taken before the engine powers up once more.

There is a clear desire for the regime to be moved predominantly from legislation into FCA handbook rules and guidance, on the basis that this will make it less cumbersome and more agile

Breaking the chain

The SMEs utilising asset finance to take the next step

John Phillipou Managing Director of SME Lending Paragon Bank

If you ever need reassurance of the underlying strength and potential of the UK economy, all you need do is look at our SMEs. Resilient, committed to innovation, and passionate about delivering growth – SMEs are the backbone of our economy and are set to be the driving force behind our national economic recovery.

To fulfil this role it is vital that they continue to be able to acquire the assets necessary to support their operations, but the challenges of recent years have put asset supply chains under continued pressure.

The pandemic saw the number of new assets reaching the UK market fall and the subsequent global economic slowdown has caused many SMEs to make the pragmatic decision to replace existing assets once market conditions improved. However, just when this improvement started to become a reality, supply chains were further impacted by the devastating war in Ukraine, the energy crisis and subsequent rises in inflation.

SMEs who had strategically waited to replace assets are now faced with the choice of paying higher prices due to inflation and low supply or holding on to their existing equipment for longer incurring higher servicing and maintenance costs. It is understandable that many chose to retain equipment but by doing so fewer items of used equipment came onto the market – pushing up prices and putting more pressure on supply chains.

We have also seen the general availability of assets to smaller SMEs being reduced by the ability of larger corporate businesses to leverage their buying power and ringfence future deliveries via large purchase orders from suppliers. Some SMEs have had to hold on to existing assets even when they were in a financial position to replace them.

Despite the impact of this limited availability of equipment and higher prices, it has not stopped the underlying need of SMEs to acquire and manage their equipment. As SME lending specialists, Paragon is privileged to work with fantastic brokers daily and there is clear demand from businesses to replace existing assets and expand operations with new technology.

The welcome news for SMEs, brokers, and lenders is that the challenges of recent years are starting to dissipate. Equipment availability is improving, delivery times are speeding up, and the cost of borrowing is hopefully set to fall as the year progresses.

The appetite of SMEs to invest will also receive a boost thanks to newly announced government support. Recognising the importance of SMEs to economic growth the Chancellor, Jeremy Hunt, unveiled in his March Budget Full Capital Expensing, which allows firms to write-off 100% of qualifying capital expenditure in the UK against taxable profits for the next three years. Whilst the devil is always in the detail on such schemes, the underlying intention to replace the super-deduction and stimulate investment is key messaging here.

After the challenges of recent years conditions are right for SMEs to invest – and Paragon is ready to work with our broker partners and make sure they have access to the financing necessary to make this happen.

The deciding factor

How much does ESG figure in lender selection

Matthew Shepherd Chief Commercial Officer Skipton Business Finance

For the last few years, the focus of business owners has non-surprisingly been on surviving the ever-changing economic climate. Although the state of the economy is still uncertain, more and more businesses are beginning to return to pre-COVID practices and seeing more and more normality return to their sectors. With priorities now being less focused on survival and more on growth and development, SMEs are beginning to prioritise sustainability and ESG as part of their business model but are being held back by economic uncertainties.

In a recent survey by the British Business Bank, results showed that a third (33%) of SMEs said they were making their business more environmentally sustainable, with a further 15% stating that it is something they want to improve. In a recent survey conducted by Skipton Business Finance on their client base, which covered UKbased businesses from a range of sectors including manufacturing, haulage, recruitment, and printing, results also showed that a third of businesses had already made or were currently making changes to be more sustainable.

Although SMEs are trying to prioritise ESG, 67% of those surveyed by the British Business Bank said that current economic conditions were the top obstacle for them becoming more sustainable. Other reasons included ability to make changes to premises, access to external finance and availability of relevant advice. Similarly, in the

research conducted by Skipton Business Finance, results showed that although 77% are feeling optimistic about 2023, many cited their concerns, including the uncertainty and lack of confidence in the current economic climate.

Influence on lending criteria

Of the SMEs that are prioritising sustainability as part of their business plan, 60% of these stated their main reason for this approach was to fulfil Corporate Social Responsibility (CSR), according to the British Business Bank. This suggests that it is not only a preference to be more sustainable as a business, but a policy which many are aiming to adopt.

With this in mind, it opens up the question of whether SMEs are being more selective with their lenders when looking for a finance

Do businesses categorise ESG when choosing their financial partners in terms of how

are?

“

sustainable those lenders

product? More specifically, are they looking for a sustainable lender? What are the top priorities of businesses when looking for a lender and how highly does ESG rank?

We all know that there are numerous incentives and grants available to support a business’s own transition to, for example, zero and ultra-low emission vehicles. And according to research by the British Business Bank, 11% of SMEs – roughly 700,000 smaller businesses – have accessed external finance to support net zero actions and 22% are prepared to access external finance to do so within the next five years.

But the specific question we are asking is: do businesses categorise ESG when choosing their financial partners in terms of how sustainable those lenders are?

For example, in 2022, the Skipton Group (which includes SBF) successfully cumulatively reduced single use plastic waste by 83% versus 2019 levels and in that very year accelerated several plans put in place that transitions the group to net zero. Would facts like this persuade a business to be more inclined, or more comfortable, to choose a lender knowing that they have an ESG strategy in place?

Skipton Business Finance also formed a charitable partnership strategy with charities Menfulness and The Pink Ribbon Foundation in addition to donating a sizeable pledge to the Disasters Emergency Committee’s Turkey-Syria Earthquake Appeal to support urgent relief efforts. In fact, the Skipton Group’s charitable donations in 2022 was £1.2 million.

During the sales process between prospect and broker, and then when the lender is introduced, how do facts like this influence a business’s decision-making process when choosing what lender to go with?

Analytics would suggest that more and more businesses care about their own businesses becoming sustainable – to help protect the world we live and to be more charitable to those less fortunate than ourselves – but also more trends are emerging to suggest that those very businesses also care about the sustainability credentials of their supply chain. Therefore, my questions are: does the commercial broker already consider these increasing ESG frameworks when speaking to their clients and pairing them up with an appropriate lender? When does this become a key requisite?

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With priorities now being less focused on survival and more on growth and development, SMEs are beginning to prioritise sustainability and ESG

Inspiring loyalty

How lenders can maintain robust broker panels

Dawn Trustam Sales Director – Property Lending StreamBank

How can lenders attract and keep brokers loyal? To answer that, you must look at the question from both perspectives, and for me, loyalty can only be built when both parties work at it.

Loyalty is rare these days. I, like many people, search for the best priced car insurance every year and don’t think twice about changing my provider because I view car insurance as a commodity. And the choice of lenders in this industry is vast. I think the last time I checked there were over 200 and technically we are all doing the same thing just with different technical and risk adaptations, so what makes brokers stick with lenders and lenders stick with brokers?

From my perspective – and speaking with nearly 20 years’ industry experience – the one thing that has helped me in conversations with brokers is to just be honest and transparent throughout the process and manage the expectations of anyone working with you as best as you can.

If a case cannot be considered, that’s fine, but give that ‘no’ quickly based on the information you have been provided. Which leads me on nicely to what can brokers do to build loyalty. For me, the biggest thing a broker can do to get the best out of a lender is provide them with the relevant, factual information from the outset. The best broker and lender relationships are where the good, the bad, and sometimes the absolute ugly can be discussed from the outset, for me, this is worth its weight in gold. We want to build strong relationships with all who we work with and provide that human approach to each case that we see and to know the worst bits from

the start just allows us to overcome these issues before it gets too deep and starts costing people unnecessary time, effort, and fees.

A lender that is known for thinking commercially on complicated deals and who has someone that you can have a conversation with gives a broker the confidence that the enquiry has a place and can be quoted on.

Respect is something that is not mentioned that often, but this is a key element. A lender and a broker must have mutual respect to be able to work together and this can only be proven over time. Unfortunately not every enquiry will go according to plan, but as long as you can be open, honest, and respectful you can only hope that the business relationship remains intact and ready to move forward again.

Commission is always an emotive subject, but one that is important and should be recognised for the work done by both parties. However, commission by itself can’t create loyalty, for me, it is only another building block in the relationship.

“

The best broker and lender relationships are where the good, the bad, and sometimes the absolute ugly can be discussed from the outset

Four tips to maximise asset valuations

To get the best valuations for your clients, here are the team’s 4 top tips to help maximise the value, right first time...

“Always supply supporting documentation if you have it. A specification or quotation is really helpful and enables us to fully understand any incremental costs.”

Tip

“ When supplying details of more than 5 assets, please provide all the information in a spreadsheet covering make, model, age, and usage plus include additional specifications as these can have a huge impact on the valuation.

Tip

“It is often critical to understanding the asset and what is included within the transaction, such as options and warranty periods. It is also helpful to see supporting documentation in the form of quotations, scope of supply, or an order form as opposed to generic brochures.”

“If an asset is refurbished let us know when, who carried out the work, and what has been replaced. These details often have a positive impact on values.”

newbusiness@haydockfinance.co.uk

3 on specialist assets from Andy

2 on multi assets from Kai

Tip 4 on refurbished assets from Nicola

Tip 1 on new assets from Claire

A slow boil

An update on EPC regulations for private rentals and how brokers can help

Sophie Mitchell-Charman Commercial Director

Is it just us, or has the flurry of attention being paid to upcoming Energy Performance Certificate (EPC) changes quietened down?

After the government announced its intention to require all new-build private rentals to have an EPC rating of at least C by 2025 – and 2028 for the rest – lenders, brokers and landlords alike kicked into gear to understand and get ahead of the changes. Green ranges were launched, incentivising landlords to purchase properties with higher EPC ratings, and the advantages of bridging and bridgeto-let loans in helping landlords meet the demand early was communicated widely.

In the last few months, however, there has been very little noise. So why has the market gone quiet on these quite seismic changes to the rental sector, and what should landlords do?

Uncertainty

Probably the most immediate answer to explain why the market has gone quiet around EPC deadlines is the amount of political uncertainty. The intention to set these standards was made in 2021; however, confirmation of the new changes and the 2025/2028 dates has not been forthcoming. The longer this delay goes on, the more landlords have begun to call for a delay to implementation.

Landlords have made some moves to address EPC ratings, but with housing Ministers coming and going, and three Prime Ministers through the doors since the first announcement, they can be forgiven for thinking these priorities might change.

Other factors have been at play since then as well: inflation, remortgage

costs, labour and material shortages. All of this creates an environment where landlords are naturally cautious about committing to a large capital expenditure to upgrade their properties, especially if they have sizeable portfolios.

What are landlords saying?

Recent research from MFS showed nearly 80% of landlords have at least one property with an EPC rating of D or below, while only 58% are aware of the upcoming changes to the rules, with just over a third (38%) saying they fully understand the new regulations. Overall, it is a messy picture, with landlords not knowing whether to stick or twist over the changes which could be as little as two years away.

What should landlords do?

Lenders across the board reacted to the changes by encouraging landlords to be proactive and start future-proofing their properties ahead of the EPC changes alongside trying to establish a culture focusing on the reduction of emissions and implanting home efficiencies.

In a busy two years for remortgage business, lower rates for higher EPC properties clearly set the stall that this is where landlords’ priorities should lie.

“

Overall, it is a messy picture, with landlords not knowing whether to stick or twist over the changes which could be as little as two years away

LendInvest

The case to make the investments in energy efficiency – regardless of the threat of increased regulation – has been made pretty comprehensively this past winter as well, where a cold snap combined with skyrocketing energy bills put pressure on tenants’ finances, and on landlords who include bills within the rent. Investing in these efficiencies now will start paying landlords back over the next few winters, and if the 2025 and 2028 deadlines are still enforced, then they are already ahead of it.

HMO. MUFB. LTD Co.

Being flexible with financing will be key

We’ve spoken to many landlords about the advantages of capital-raising against one property to fund works across the portfolio, or alternatively using a bridging loan or bridge-to-let finance. Like a buy-to-let property itself, meeting EPC changes are an investment opportunity that can return rewards for landlords who are prepared to take on the challenge. It is up to brokers and lenders to continue facilitating it.

Specialists

Donʼt put all your eggs in one basket

The outlook for agricultural businesses in 2023

Robert Bourn Director Farm Finance

Jeremy Clarkson’s hit TV show, Clarkson’s Farm, has become a cultural phenomenon, winning over audiences worldwide with its unique blend of humour, drama, and informative insights into the challenges facing modern-day farming in the UK. Whilst the show has been praised for its entertainment value, it has also brought much-needed attention to the critical issues facing the farming industry today. In particular, it has highlighted the need for greater investment and support for sustainable farming practices, local food production, and diversification.

One of the key themes of Clarkson’s Farm is the importance of diversification in promoting sustainable farming practices. By diversifying their income streams, farmers can create a more resilient and sustainable farming sector. The show explores a variety of diversification strategies. Other often used strategies include renewable energy, holiday lets, and even selling ice cream. These strategies not only provide farmers with additional revenue streams but also promote tourism and support local economies.

Moreover, the show emphasises the importance of local food production, which can help reduce food miles, promote healthier eating habits, and support small-scale farming operations. By highlighting the benefits of buying locally produced food, the show is helping to drive demand for locally grown produce and supporting small businesses in rural areas.

Another important theme of the show is the need for greater investment in the farming industry. The UK’s departure from the EU has led to a reduction in subsidy levels and a shift towards a more market-oriented approach, which has made it increasingly difficult for farmers to balance environmental concerns, food security, and profitability. As a result, specialist lenders such as Farm Finance, who work closely with many NACFB Members, have been instrumental in providing farmers with access to financial products, support, and advice, ensuring that farmers have the resources they need to succeed.

Climate change is another major challenge facing the UK farming industry, and Clarkson’s Farm addresses this issue head-on. Extreme weather events such as droughts and floods can have a significant impact on crop yields and livestock health, making it increasingly difficult for farmers to produce food sustainably. The show explores innovative solutions to this problem, such as using cover crops to improve soil health and reduce erosion.

Beyond the issues related to farming, the show also shines a light on the importance of preserving rural communities and the cultural heritage of farming in the UK. It highlights the role of farmers in maintaining the landscapes that have shaped British identity and culture for centuries, as well as their contributions to the wider rural economy.

The show has not only entertained audiences but also brought much-needed attention to the critical issues facing the UK’s farming industry. By promoting sustainable farming practices, supporting diversification, and providing farmers with the resources they need to succeed, we can help ensure the farming industry continues to thrive for years to come. With its entertaining yet informative approach, Clarkson’s Farm has succeeded in inspiring a new generation of farmers and promoting a greater appreciation of the work they do.

Long in the tooth

A dental sector bracing for change

Clare Briggs Associate Director TradeBridge

UK dentists have had to cope with challenging sector dynamics of late, with years of stagnant state funding and an NHS dental contract that arguably, is not fit for purpose. Then overlay the government clawbacks associated with underperforming against post-pandemic NHS targets, that are by many seen as unrealistic and it is no wonder then that almost half of dentists have reduced their NHS commitments and thousands have cut ties altogether, in favour of private practice.

Whether dentists are moving into the competitive private market, staying within the NHS or seeking a better balance between the two, running a successful dentistry business today comes with a host of challenges.

A sector at crisis point

The impact of the pandemic on dentists was in some ways unique. Whilst many businesses struggled to recover post lockdowns, the dental sector was hit by a wave of pent-up demand. Closures and restrictions resulted in a year’s worth of lost appointments, but post-pandemic, demand persists. Many practices are trying to mitigate the impacts of years of NHS underfunding, whilst managing the rigors of post-pandemic service requirements.

26.4 million courses of NHS dental treatment were delivered in the UK in 2021-22, the BDA says. That’s just two-thirds (67%) of the

39.4 million delivered, on average, in each of the five years before the pandemic. Over a year’s worth of NHS dental appointments have been lost since the first COVID lockdown, and the BDA estimates the resulting backlog will take years to clear.

To make things even harder, since 1st April 2022, dentists have been compelled by NHS targets to hit 100% of their pre-pandemic activity, and will see NHS revenue clawed back if they fail to deliver their targets of Units of Dental Activity (UDAs). Despite this pressure, the BDA says there have been no gains in the volume of NHS dentistry delivered.

Filling the gap

To succeed in this uncertain post-pandemic landscape, dentists must have the freedom to invest in successful commercial businesses, to build the capacity to tackle the backlog of procedures and take on new patients. As the sector evolves with a greater focus on the business itself, there has never been a better time for dental practices to expand their services and build thriving businesses, whether they’ve just started out, are looking to grow by acquisitions or simply want to keep up with current demands. But all of this takes a substantial investment, which requires working capital.

Going forward, the working capital requirements of dentists will be bigger than ever before, as practices are going to need more of everything to tackle the pent-up demand for treatment. Whether a practice decides to focus on NHS patients, private practice or a combination of the two, a flexible and ready supply of working capital should be at the top of its list of priorities.

Moving into private treatment means surgeries will need to spend more on marketing, facilities, and training to keep up with rivals in a highly competitive market. Practices have to consider investments

such as expanding their patients’ services, updating their reception facilities or investing in technology, automation and staff, as well as considering acquisitions to grow their businesses.

For NHS dentists, the challenge is how to service their NHS patients efficiently and meet challenging targets, while simultaneously operating successfully at a commercial level, often by combining private with NHS treatments. With NHS funding in short supply and a history of years of structural challenges, dental practices must prioritise operating as successful businesses first, or they won’t be able to care for patients at all. Whatever the future holds, the one thing dentists cannot afford to do is stand still.

Choosing the right finance partner

Traditional finance simply isn’t suited to scaling a modern dentistry business. A specialist partner like TradeBridge, who understands how dental practices work, can help dentists to seize opportunities and adapt to challenges on the horizon.

With years of experience in the dental sector, we’ve designed a finance facility specifically for dental practices that uses real-time trading data and other information to make a faster, more accurate risk assessment that reflects the true strength of a business. That means we can offer a flexible, revolving line of credit of up to three times a dental practice’s monthly income, with no restrictions on its use, no fixed repayments, immediate online access, and the freedom to only draw down (and pay for) what the practice needs.

At TradeBridge, we speak to all kinds of dentists every day and we hear a common theme. At a time of seismic change, it’s wise to prepare for an uncertain future, whatever your goals. Choosing flexible finance gives you the working capital to be confident. Whether you want to seize the day and grow your business aggressively through acquisitions, start a new practice or simply invest to keep up with patient demand in an increasingly competitive market, the future is bright for those who are ready for it.

“

Going forward, the working capital requirements of dentists will be bigger than ever before, as practices are going to need more of everything to tackle the pent-up demand for treatment

Welcome to Scotland

Opportunities

from lobbyists who claim that 2019 reforms did little to appease the situation. The fees associated with planning and the delays in achieving approval can impact lending decisions, leaving SMEs between a rock and a hard place.

Amidst prevailing political and economic turbulence, the Scottish housing market continues to show promise, primarily in Edinburgh and Glasgow, where activity levels are currently matching pre-pandemic levels. Whilst this may be enticing to many SME developers, the unique nature of the Scottish market, along with the challenges and opportunities it presents, must not be underestimated.

The challenges

Historically, the Scottish market has struggled with a lack of funding options due to fewer bridging lenders, challenger banks or secondary funders being willing to commit to projects north of the border. Whilst the market has matured, most lenders are still based outside Scotland. SMEs can face some resistance because of this, as those lenders won’t fully comprehend local demographics, or market trends, often favouring projects across the central belt of Scotland, which can be a little short-sighted.

This creates a gap in the market for a specialist lender such as Signature because we have a base in Scotland and can monitor market conditions and adapt our offering to suit. Such local expertise can also be beneficial when it comes to navigating the challenges posed by the Scottish planning system.

The process itself can often be a little off-putting for lenders as it is notoriously costly and lengthy, often garnering much criticism

It needn’t be a deal breaker, however, as a lender with a better grasp of the Scottish planning process can advise how to best navigate any resulting funding variants. We, for example, would take planning gain into account within our analysis around how much to lend, because we know that the value of land will go up once planning permission is obtained.

Of course, the fall-out from Brexit and COVID still poses an ominous threat to the market too. The current skills shortage is one such hindrance. Government statistics show that National Insurance Number registrations of EU nationals in Scotland for the first quarter of 2021 were 70% below their pre-pandemic levels, with only 3,600 visas being granted to EEA nationals during the year ending March 2021, 30% of which were under the Skilled Worker category.

abound, if you know where to look

“

Rural areas and market towns perhaps represent the best investment opportunity for SMEs

Scott McClymont Relationship Manager (Scotland) Signature Property Finance

Then there is the matter of rising construction material costs. After reaching a 40-year high in 2021, based on the annual growth of the BCIS Materials Cost Index, inflation has slowed, but predictions are that the costs will continue to rise in 2023 by an average of 4%.

Opportunities and growth

We expect more SME developers to come into the market once they recognise that it is now easier to access funding than it was previously. And there is a need for it too because the construction of new housing in Scotland is at a critical point, with Homes for Scotland reporting in 2022 that the country was suffering from a chronic housing shortage of about 100,000 new homes, because of “consistent undersupply”.

Rural areas and market towns perhaps represent the best investment opportunity for SMEs. There is a trend, driven by the shift to remote or hybrid working, of people wanting to acquire family-sized properties that offer the best of both worlds; rural, yet commutable.

Scotland benefits from a public transport network that can provide reasonable travel times, making many previously underdeveloped areas prime for investment. The key will be to assess market towns based along the main train lines running out from the major cities, for land, conversion, or flipping potential.

Also, not to be underestimated is the huge potential for investment in holiday homes in rural Scotland. In 2022, Sykes Cottages reported a 47% year-on-year increase in Scottish staycations, with 80% of Scots opting to holiday locally. So, seeking possible development or conversion prospects as either second homes or vacation properties could also deliver strong yields.

Both avenues would present excellent opportunities for first-time developers looking to break into the Scottish market. Fears about obtaining funding should not act as a barrier. At Signature, it’s not always the experience that is the deciding factor, it is the potential of a project, and having a structured plan in place.

For first-timers, it’s often better to approach a deal differently. For example, work on a multi-property or unit development, might be better phased in smaller parcels, with funds drawn-down gradually to help with the fluctuation of interest rates, product costs, or labour availability.

It’s crucial to research thoroughly before committing too much time or money to any project. Connecting with partners with intimate knowledge of the local area should give you a competitive edge in this respect and ensure that you don’t come unstuck in chasing a deal not suitable for the Scottish market.

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Historically, the Scottish market has struggled with a lack of funding options due to fewer bridging lenders, challenger banks or secondary funders being willing to commit to projects north of the border

The only way is up

The rise of the commercial finance broker

Tony Newham Director and Owner Key Commercial Finance Solutions

In 2007, the high street banks dominated commercial lending in the UK with only around 15% thought to be routed through an intermediary. That same year, I handed in my notice to HSBC to follow my dream of a new career as a commercial finance broker. Most people thought I was mad, not least because, at the same time, the queues forming outside Northern Rock were presage to the forthcoming recession.

When asked why I was quitting my job at such a precarious moment, I told people that in the USA, at least 80% of all commercial lending was routed through an intermediary. Businesses over there saw brokers as their first point of call and I suggested – slightly tongue in cheek and wanting to be optimistic about my chances of success – that as the UK tends to follow the USA in many things, there was a strong possibility that the future of the broker looked very bright.

Of course, no one could have fully predicted the impacts of the 2008 financial crisis and the subsequent recession which led to the high street banks massively curbing their appetite to lend. Then, with super-low interest rates driving investors to find better returns for their money, the challenger banks were born. I recall Aldermore setting up in 2009 which, at the time, was a great new development and the first of the big new names to get going.

Fast forward to today and there are now dozens of challenger banks with full Banking licences. The high street banks have lost their massive domination of the market. Banking, and lending in particular, is now much more fragmented, with perhaps c.500 commercial lenders out there. Even now, every month brings new players to market.

At the same time, innovation has run riot – unconceivable when I was a banker at HSBC. Think peer-to-peer, the many cashflow lenders, spot invoice financing, specialist trade financiers, and the huge number of specialist and short-term property lenders.

One could argue that the 2009 recession has led to some good outcomes. SMEs’ reliance on the high street banks has lessened as businesses increasingly switch to the newer lenders with niche or targeted offerings that better meet their needs.

And what of my prophesy for the fortunes of the UK broker? Well, I’m still a broker, so the career change was a success. But the achievement is not just limited to me – today, the importance of the intermediary is most definitely echoing the American model. As the NACFB annual survey shows; of the commercial lenders (including some of the high street banks) that operate both direct and broker-led business models, 70% of their new business came via the broker channel in 2022.

“

As the UK tends to follow the USA in many things, there was a strong possibility that the future of the broker looked very bright

David and Goliath?

The rising demand for social enterprise funding

Jason James Relationship Manager Unity Trust Bank

The theme of socially responsible lending is never far away from the industry agenda. But rarely is it the subject of a blockbuster movie. Enter Netflix’s new film ‘Bank of Dave’, which is based on the true-life experiences of Dave Fishwick; a successful entrepreneur from Burnley who set up a community bank to help local businesses thrive.

The film, released earlier this year, tells the David and Goliath tale of one man’s ambition to venture beyond the traditional economic model and to place his ‘community’ at the heart of a business alongside commercial outcomes. The film highlights the benefits of helping those that are least able to secure access to the type of investment that can facilitate greater social mobility.

Whilst part fiction, Fishwick’s claims that he had regulatory pushback from the regulator – who demanded he raise several million pounds in security as part of his application to become a real bank, are true. That money however was never raised, and the company isn’t actually a bank (technically it’s an ‘independent lending company’) and is still in the process of trying to get its banking licence as The Bank of Dave. The good news is that all the work we see Fishwick aiming for in Bank of Dave – lending to local people who struggle to get a loan elsewhere, giving decent interest rates on savings, donating profits to charity – is entirely real.

Today, thousands of community-led businesses are driving real

social impact for millions of people across the UK. There are more than 100,000 social enterprises in the UK, contributing £60 billion to the economy and creating two million jobs. Responsible Finance reports that last year, Community Development Financial Institutions (CDFIs) lent £73 million to 383 social enterprises and £65 million to 890 businesses, supporting 2,520 new organisations to get off the ground as a result. It also reports that 94% of the established businesses receiving loans had been declined by another lender, which highlights the significance of this investment stream.

Unity Trust Bank supports CDFIs across the UK, including First Enterprise, which was set up to support ethnic minority communities after the Nottingham Riots in the 1980s and has gone on to help thousands of SMEs. First Enterprise supports business owners who face barriers to mainstream funding and over the past decade has lent £48 million to more than 1,600 businesses in the East Midlands, safeguarding over 3,350 jobs. In 2022, 43% of our lending was deployed to organisations based in high deprivation areas, ensuring our funding reached the communities that needed it most.

Social enterprises align to Unity’s commitment of being a commercial bank with a social conscience, demonstrating how successful businesses can contribute positively to society. Some social enterprises have historically struggled to get funding from mainstream banks. The ability of the leadership team to forge partnerships with like-minded financial institutions and investors will be pivotal, determining whether they will achieve their funding ambitions.

Unity will continue to help fund this sector and provide support through our nationwide team of relationship managers. This way we can help social enterprises to continue to help people to write their own script and shape their own future.

Carry that weight?

The PRA’s proposals for Basel 3.1 and SME lending

Dr. Andrew Mell Technical Adviser Oxera

The Prudential Regulation Authority (PRA) has introduced proposals for the implementation of Basel 3.1 prudential standards in the UK. These standards would govern how banks are supposed to keep capital ‘on hand’ so as to cover potential losses on loans. Broadly speaking each type of loan has a ‘risk weighting’ attached to it which determines how much of the outstanding loan at any point contributes to the ‘risk weighted assets’ of the bank. The bank is then required to keep a certain amount of equity capital in reserve to guard against potential losses on their loans – how much capital is broadly determined by regulators, but it is normally expressed as a percentage of the risk weighted assets. In setting risk weightings, small banks must typically use what is referred to as the Standardised Approach (SA); while larger banks have a certain freedom to use their own data to produce Internal Ratings Based (IRB) models of risk to assign risk weightings.

The PRA is reviewing how those risk weights should be determined for all kinds of loans including loans to SMEs. Generally speaking, risk weights for SME lending are set to increase. The last time this happened, in the wake of the global financial crisis, the EU took a collective decision to introduce an ‘SME Support Factor’ to ensure that SME access to finance would not be adversely affected by this tightening in prudential requirements. The PRA is now proposing to remove the SME Support Factor in the UK (it is likely to be retained in the EU). They are also proposing to put a 100% floor on the risk weighting attached to SME loans secured on property; and to impose an output floor on the IRB models used by larger banks so that they cannot (averaged over their whole portfolio) produce risk weightings too much lower than the SA.

We note that the 100% floor on risk weightings for secured lending would mean a higher risk weighting than for unsecured lending. This has the potential to provide perverse incentives as, in terms of funding costs, a secured loan would be more expensive for a bank than an unsecured loan to an SME. Risk weightings should reflect the risks posed by the loan and a secured loan is less risky than an unsecured loan because, in the case of the former, if the borrower fails to repay, the bank can recover the asset used as security and use it to recover at least some of the outstanding loan amount.

As far as SME lending is concerned, this means that risk weightings are likely to rise. The likely result is that lending to SMEs will fall. Oxera’s research – commissioned by Allica Bank – found that risk weights for SA banks could increase by around 32% and the increase could be even larger for IRB banks. Such an increase in risk weightings could lead SA and IRB banks together to cut back on their lending to SMEs by up to £44 billion.

This is concerning as the research that has been done on the SME support factor shows that: first, it is likely to have improved access to credit for SMEs; and second, that it is in line with the prudential risks involved in lending to SMEs. Moreover, SMEs are an important part of the UK economy accounting for around 60% of private sector employment and around 50% of private sector turnover. Over the last 10 years SME turnover and SME employment have increased faster than for larger firms. However, one of the most important problems that more successful SMEs encounter when trying to scale up is difficulty in accessing finance. If banks cut back on SME lending, this is a problem that will only be exacerbated. SMEs are also particularly reliant on bank finance as they lack direct access to wholesale credit markets that larger firms may enjoy.

Furthermore, it is worth noting that important progress seems to have been made in terms of SME access to credit, with SME lending having grown by £27 billion over the last 10 years. This appears to have been driven, not by the large banks using IRB models, but by the smaller banks using the SA risk weightings, at least 10 of which entered the market after the introduction of the SME support factor in 2014. None of these banks would be systemically important to the UK financial sector, they’re simply too small.

The PRA has conducted a cost-benefit analysis of their proposals. Broadly this examines the potential benefits across the entire UK economy in terms of reduced likelihood of financial crisis and the associated costs; and trades that off against the cost of lower short -term economic growth because of lower lending brought on by higher risk weightings. While we do not object to the PRA’s general approach and completely agree with the economic necessity of sound prudential regulation of banks, our research provides grounds to believe that, in the case of SME lending, the PRA has overestimated the benefits of tighter prudential standards in relation to these small, systemically unimportant banks; and underestimated the costs of reduced lending to SMEs, that the Bank of England itself once described as an ‘engine of growth’.

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In the case of SME lending, the PRA has overestimated the benefits of tighter prudential standards as regards these small, systemically unimportant banks

Balancing the scales

Increasing access to finance for women-led businesses

Olivia Ridley Head of Capital Markets SME Capital

Women-owned businesses continue to be a growth engine for the UK economy, with female founders starting a record number of UK companies in 2022. Yet data reveals that women continue to face greater adversity when it comes to raising funding, with loans approved for female business owners nearly one third less than for their male counterparts.

Reaching gender equality in the commercial lending market still has a long way to go – for the lenders, the borrowers and the brokers; however, progress is being made. A recent Financial Times report showed that UK executive targets for women have been met three years ahead of schedule, with two out of five board seats at FTSE 350 companies now occupied by women.

The annual FTSE Women Leaders Review found 40.2% of directors at the UK’s largest listed companies were women last year, surpassing the voluntary threshold set for 2025, and up from just 9.5% 11 years ago.

Figures from the Rose Review Progress Report 2023, an independent review led by the CEO of NatWest Group, Alison Rose, showed that

female founders started a record number of UK companies last year with more than 150,000 enterprises created, more than twice the number of 2018. That’s one-fifth of all businesses in the UK run by women in 2022, many not experiencing equality in getting the right funding. This is a huge opportunity for the broker community.

As Denise Wilson, chief executive of the FTSE Women Leaders Review, put it: “The hushed, water-cooler conversation on the lack of women from yesteryear has evolved into a core and critical business topic.”

It’s a familiar story for most with data showing that women-led companies find it harder to raise initial funds than those started by men, and face further hurdles convincing investors to back their growth. In fact, half of women entrepreneurs have found access to

by men

Traditional money lending methods follow the conventional practices of favouring financing business owned

funding and investment hard in the past 12 months compared with 40% of their male counterparts. Further, 44% of women expected fundraising to become more difficult in the coming months.

The challenges were even more pronounced for black women, with more than two thirds of black female business owners finding the process challenging.

The government is trying to encourage the journey to equality. Last year it launched the ‘Taskforce on Women-Led High-Growth Enterprises’ to support women entrepreneurs, tackle investing barriers, and increase the number of women-led fast-growing businesses. The Taskforce aims to give women entrepreneurs the tools to take their businesses to the next level including increasing access to finance and growth capital, technology adoption and leadership skills.

It is good to know that there is an improving pipeline of female-led start-ups, many of whom are disrupters and innovators in their field, and government and investor-led capital funding initiatives are being established to support start-ups and SMEs looking to refinance.

However, there is the long-standing view, supported by the data, demonstrating that traditional money lending methods follow the conventional practices of favouring financing businesses owned by men.

Most lending businesses are run by men, and the lending models

created by bank lenders are also predominately male-led. So, is it as simple as male business owners are taken more seriously than women? Possibly but the imbalance is changing.

With 150,000 new businesses being created by female founders in 2022 alone, in three to five years’ time, with the right backing and scaling, these businesses will be SMEs looking for funding for growth, acquisitions and other strategic milestones. It’s an attractive proposition for both lenders and brokers, especially when you consider that women tend to be reliable borrowers, with a lower insolvency rate than their male counterparts. They are also more risk-averse, considering long-term implications as more important than potential short-term gains. Further, they are less likely to overstate their financial or strategic position.

It is good news then that several small lenders are now acknowledging the under representation and difficulty faced by female entrepreneurs and are responding by offering better interest rates and loan terms for female borrowers for loans in the £1-500,000 space.

The increase in women establishing businesses is a real opportunity for brokers to step in and step up, and support female entrepreneurs get access to debt capital. Finding these businesses is unlikely to be difficult but may require brokers to try new channels and marketing angles. It could also lead to brokers choosing to work with lenders who are focused on doing more to support female-led businesses. And that’s where SME Capital comes in; so do get in touch if we can help.

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Women tend to be reliable borrowers, with a lower insolvency rate than their male counterparts

Five women and their experiences of working in financial services

Last month’s International Women’s Day provided the NACFB with an opportunity to celebrate the women that we admire, that we love, and that are making businesses and society a better place. Here are insights from five women working at the trade body and at different stages in their career who reflect on their experience of working within what is still (although rapidly changing) a male-dominated environment.

“I come from a background of strong, no nonsense, ‘don’t moan about a problem, find a solution to it’ females. Whilst neither my mother or grandmother had high-flying careers, their examples stood me in good stead for a career in finance. I often think about what advice I might offer my daughter – and actually – it isn’t any different to the advice I’ll probably offer to her twin brother. Find your own path, don’t pay attention to peer pressure, and understand what you enjoy and what you’re good at, those are the things where you’ll most likely succeed. Balance that with finding ways to step outside your comfort zone and challenge yourself. There’s nothing as satisfying as achieving something you didn’t think you were capable of.”

“When I first started my career at a high-street bank, the overall ratio of women to men was a low one. I did see a steady rise as the years went by and I was very lucky to work with some great male leaders who supported my journey over 27 years. The training programmes and development opportunities were remarkable, but I had to work extremely hard in a male-dominated culture for promotions. I am appreciative of the things I learned throughout my banking career as they have given me the confidence to move on to other financial companies. Overall, I have seen improvements in gender equality but there is always more to do.”

“When I started in what felt like a male-dominated working environment, speaking up in meetings could be daunting, but I soon realised that my input was as valuable as others. Overcoming imposter syndrome and realising that you have a lot to bring to the table is something that really opens opportunities. Getting outside the comfort zone is also where all the exciting things happen. I remember returning to work from maternity leave some years ago, and with the new demands outside of work I needed a speedy development of my juggling and multitasking skills.”

“More needs to be done to break down the boardroom barriers to enable more women a seat at the C-suite table. Women often bring a different perspective, enhance the diversity of thought, tend to be excellent communicators, strong relationship builders, and fiercely loyal. As a single mother I feel lucky to work for an employer who measures my value by my knowledge and experience and not my gender, but it also feels sad to say I’m lucky, as I know many women in the industry who continue to face barriers.”

“I can say with all honesty that so far I haven’t noticed any downsides to being a woman working in financial services. Both my female and male colleagues are very supportive and encourage me to expand my knowledge of the sector every day. Of course, it helps that I’m surrounded by strong, confident, knowledgeable women who I know are routing for me to succeed. If I had started my career 20 years ago, my answer may well have been quite different but of course, we’ll never know.”

Caroline Boughenou 27 years in financial services

Louise Knapper 23 years in financial services

Charlotte Mathieson 17 years in financial services

Nicola Newborough 27 years in financial services

Imogen Wright 2 months in financial services

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Five Minutes with: Luke Jooste

Luke Jooste CEO Merchant Money

Describe your role in ten words or less?

Ensuring our business and its people operate optimally.

How do you make a difference?

Providing tangible and practical leadership along with strategic direction for the business.

What is the best live music experience you’ve ever had?

Rolling Stones live at Twickenham, London.

If you were to start your own small business, what would it sell?

Artificial intelligence.

What advice do you have for the modern commercial finance broker?

Be honest about a deal’s risks or weaknesses and how they are mitigated.

If there was an Olympics for everyday activities, what activity would you have a good chance at winning a medal in?

Multitasking.

What is your favourite SME success story?

Checkout.com

What’s the most common reason for turning away a deal?

Poorly packaged and not being clear on potential risk mitigants.

Where is your favourite place in the world and why?

Lisbon – weather, food and people.

In your view what are the key elements to a successful deal?

Clear, concise, and commercially sensible.

Which person has inspired you the most and why?

Nelson Mandela – ability to unify people from across the world.

What was the last great book you read?

Wonderland Avenue.

What law would you pass if you were Prime Minister for the day?

Ban all social media influencers.

What is your favourite piece of management/leadership advice?

The greatest glory in living lies not in never falling, but in rising every time we fall.

What’s happening now, that in 20 years people will look back on and laugh about?

People needing to drive cars.

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