Avengers amongst us: UK businesses fuelling the recovery

In the last year, we have re-engineered how we as a society function with much ingenuity and resilience.?We have seen a leap in moving to digital ‘office work,’ digital access to health care consultations, digitally ordering meals and even digitally divorcing our partners.

These changes are often driven by innovative businesses that are adapting and changing in real-time. In Q1 2021, we talked about 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 good news is that the fate of UK businesses has improved in line with the reopening of the economy – with today 60% of businesses reporting positive or neutral trading performances.?

Much of this transition is driven by Avengers amongst us, businesses re-inventing or shifting their business models to respond to rapidly changing conditions and customer needs – creating new ways of serving customers and transforming the delivery of services.

Avengers exist in all sectors – including those that have been heavily impacted by the crisis – like hospitality and travel. The Lending Monitor looks at what distinguishes Avengers - and how lenders can identify them.

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. Our data suggests, only 4% of growing businesses accessed government loan schemes. Government schemes appear to have been effective in dulling the pain of the crisis but have not been there to support those Avengers that are driving the recovery.

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.??While there are clear signs of a bounce back of the economy, the expectation remains that we will see a K-shaped recovery – with some businesses recovering quickly while others continuing to lose cash as costs bounce back but revenues remain subdued. What does this mean for lenders seeking to deploy fresh funding?

The Lending Monitor is offering five key observations for lenders seeking to deploy funding during this next phase of recover:

• 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 provide sufficient insights into the unfolding story. As businesses are starting to trade again, are rebuilding their cashflow and are paying bills, the pattern of transactions and payments provides a strong indication of the prospects of a particular business – and the ability for funders to identify opportunities to support businesses that are coming out of the crisis stronger – as well as mitigate risks.
• Affordability will be taking centre-stage as businesses face a mountain of debt and gain new FCA protections.?Reviews in the commercial lending market before the crisis already pointed to a lack of rigour of affordability assessments. With weak balance sheets, this concern will be even more pronounced. So are new data sources going to give comfort that a business is able to demonstrate affordability of fresh funding???As so often, the public attention given to Open Banking is quietly overtaken by the utility of Commercial Credit Data Sharing (CCDS) data that is providing visibility into account balances and movements. By creating the ability to demonstrate affordability, CCDS offers a low-customer friction, fast-track route into assessing a business’ financial health – especially as some businesses are starting to re-emerge with a vengeance.
• 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 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. While the trading patterns of businesses allow us to understand the immediate path they are on, the background of directors is one of the key survival drivers, determining whether a business is thriving. For example, we have seen that where directors 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, less likely to be suffering from cashflow problems.

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 to deliver digital capabilities to the SME lending eco-system.”

Find the full Lending Monitor here: