The Avengers have saved the day, but lenders now need to adapt
Following closely on from the launch of the Funding Xchange Technologies platform, the Quarter 3 2021 Funding Xchange Lending Monitor indicates that there is now good evidence that the business recovery is underway.
However, a less conventional approach, driven by technology, will be required to ensure surviving and growth businesses attract the funds that they need, and for lenders to manage the risks in their debt portfolios efficiently.
The pandemic has accelerated the transition towards digitisation, digital ‘office work,’ digital health care, digital meals and even digital divorce. Businesses have re-engineered how they operate.
Much of this transition is driven by ‘Avengers’, businesses who have re-invented and pivoted their business models to respond to rapidly changing conditions and customer needs.
The last Lending Monitor showed that these ‘Avengers’ exist in all sectors – including those that have been heavily impacted by the crisis – like hospitality and travel. Q1 2021 saw the rise of the 50/50 economy with an almost equal split between UK businesses emerging from the pandemic that have weathered the immediate storm well and those that have been bruised. The Q3 Monitor indicates that the fate of UK businesses has improved in line with the gradual reopening of the economy – with 60% of businesses now reporting a positive or neutral trading performance.
Yet, ‘Avengers’ have been largely unable to access government funding that focused on the weakest and sought to stem a rapid rise in unemployment and business failures. As the broader economy awakens and support schemes are scaled back, the continued recovery will require these businesses that have shown their agility and performed well to access the funding they need. However, the expected K-shaped recovery – with some businesses recovering quickly while others continuing to lose cash as costs bounce back but revenues remain subdued – means that many lenders are pausing to determine whether and where to deploy fresh funding.
Katrin Herrling, co-founder and CEO of Funding Xchange, commented: “Seeking out opportunities in an uncertain time requires greater insights into businesses’ trading and payments performance. It is clear that there are attractive lending opportunities in the market and unlocking these will require digital capabilities to be able to identify and deploy funding efficiently. The use of real-time data to understand how businesses are performing is becoming even more important in these times. This is where FXE Technologies comes in, delivering digital capabilities to the SME lending eco-system.”
Funding Xchange’s Q3 Lending Monitor is offering five key observations for the next phase in the development and deployment of funding solutions:
• Going against conventional wisdom is offering significant opportunities – but requires insights that allow funders to identify attractive opportunities. Winners and losers are not defined by sector, geography or established client relationships. The dislocation we have experienced is sudden, does not hit all businesses the same way. For example, 7% of businesses in the hospitality sector have grown and almost 40% are doing as well as pre-crisis. But finding these opportunities requires funders to take a view which goes beyond sector and examines the micro-level health of the business in question.
• Risk models have never seen an economy that is awaking from hibernation and has just replaced a year’s worth of revenues with £80B in business debt. Historic data models are unlikely to prove efficient in recovery credit assessment. As businesses are starting to trade again, rebuilding their cashflow and paying bills, lenders will need to look to the pattern of transactions and payments as an indication of the prospects of a particular business, in both identifying opportunities and mitigating risks.
• Affordability will be taking centre-stage as businesses face a mountain of debt and gain new FCA protections. Commercial Credit Data Sharing (CCDA) data provides the ability to demonstrate affordability and is a fast-track route into assessing a business’ financial health – especially as some businesses are starting to re-emerge with a vengeance albeit with weaker balance sheet.
• Access to trading data can be a powerful early warning flag – if used responsibly, it is creating the opportunity to benefit borrowers and protect lenders. Understanding in real-time businesses’ revenues, costs and payments behaviour has been the foundation of banks’ assessment of risk – and through Open Banking is now equally available to lenders who are not holding the bank account relationship with a business. Understanding how a business is trading – its net cashflow – is the key predictor.
• Experience and diligence matters. The background of directors is proving to be one of the key survival drivers of a business. Directors who have a higher personal credit score – a marker of financial prudence that appears to translate into robust business management – the business they run is less likely to report a negative impact from the pandemic, less likely to be delinquent, and less likely to be suffering from cashflow problems.
