Authored by Peter Hunt
As economic activity recovers and investment increases, there is a significant risk that supply-side weaknesses will restrict the asset finance market for SMEs in the UK.
This should be a material concern for policy makers – notably, March’s budget included a requirement on RBS and Lloyds to provide £41bn of business loans (gross lending) over the next year for SMEs. At the same time, it creates commercial opportunity for a major new player to enter the market.
5 questions a new entrant may ask are:-
1. Is there a competitive space?
Yes – large funders came to rely heavily on broker introductions for the SME market. The exit of a number of those funders has resulted in huge capacity taken out of the market that cannot be filled by the smaller, entrepreneurial funders now dipping their toes back into the market.
With capital rationing, a strategic focus on existing bank customers and a material distrust of the broker market, potential for expansion of the big UK banks in this space seems limited. The capacity gap looks set to remain.
2. Are the returns acceptable?
Yes – spreads have increased and are much more attractive than a couple of years ago. Limited funding supply has and will continue to offer strong margin performance. Bad debt will continue to improve, potentially creating a very positive scenario for portfolio profits in 2011/12.
3. Can competitive advantage be achieved?
Yes - the industry model involving funders and brokers became fairly dysfunctional with poor co-ordination and realisation of sustainable value for all parties. A funder seeking to enter the broker market should develop a new business model (for more detail, I’m happy to provide a copy of a presentation I gave at a recent Executive Briefing). The good news is a growing recognition amongst the broker community that change is essential.
Targeting SMEs via the broker market is not the only route to market, and currently there is no brand-led “people’s champion” providing the implicit guarantee of simplified, fair, good value products to SMEs. The potential for such an organisation to operate by phone and internet (assuming risks can be managed) could be a game-changer.
4. Are the risks acceptable and can they be mitigated?
Yes – many of the risks currently associated with the SME market are wrapped up in the broker sector where through-life risks were managed poorly and in an unco-ordinated manner. These can be mitigated by good business design and effective process management. Going direct materially simplifies the risk picture further.
5. Is it achievable?
Yes – assuming the new entrant has access to funding to grow a significant portfolio, combined with the foresight, business design and commercial skills to make it happen. We’d be delighted to help!
If you would like to discuss this subject further,please contact Peter Hunt on +44 (0)845 003 1000 or e-mail peter.hunt@invigors.com.
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