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Thursday, September 20, 2018

Opinion > OakNorth

The neglected middle child: Why we focus on lending up to

Joel Perlman, co-founder of OakNorth Bank | 11:46 Wednesday 24th May 2017

Ricoh, the multinational imaging and electronics company, did some research earlier this year discussing a business phenomenon which it called 'middle child syndrome'.

The research concluded that the government is too focused on supporting start-ups, small businesses and large enterprises and as a result European mid-sized businesses often feel like the 'neglected middle child' and could be missing out on as much as £364bn a year in extra funding.

We believe that the same case can be made for loan sizes.

The big banks in the UK are very focused on either small loans (in the tens or hundreds of thousands) or large loans (typically above £20m), neglecting the 'middle child' of loans between £1m and £20m.

At the smaller end of the spectrum, big banks offer a number of debt options, including small general-purpose business loans, asset finance and invoice finance. To make these propositions commercially viable, these options are typically built on automated credit models which allow the lenders to process the loans quickly and efficiently. It is these models that have led to a 'computer says no' culture within many banks.

Big banks are also very focused on the larger end of the scale (loans of more than £20m), where they can justify allocating significant amounts of time and resources to properly underwriting the loan because the potential returns are substantial.

The problem with loans that fall outside of these parameters (ie those between £1m and £20m) is two-fold. They are either too large to be subject to the automated credit process that can be undertaken with smaller loans since it is difficult to justify automating this size of loan. Or too small to be underwritten in the way that big banks do with large loans because the potential returns don't make it commercially viable. As a result, businesses seeking loans of this size often end up being overlooked and underserved, which means many are unable to secure the debt finance they need to grow.

Research commissioned by American Express in February this year revealed that 57% of UK SMEs have struggled to secure growth capital and have had to seek alternative routes such as crowdfunding or P2P lending as a result. This trend has only been intensified by the uncertainty caused by Brexit, which has seen larger lenders retrench from the market. Statistics published by the Bank of England in March this year revealed that lending to Britain's SMEs by the largest UK banks fell by £536m from December 2016 to January 2017 – the largest retrenchment in SME lending since records began.

OakNorth was founded to fill this middle-child funding void. Our model focuses on how we can best support businesses with loans of up to £20m. Unlike the large incumbent banks, we give clients the ability to discuss their deals directly with the credit committee. This personal and transparent process enables deals to be completed – from first meeting to disbursement of cash – in weeks rather than the months it takes larger institutions. We have teams in the UK and India that provide deep credit analysis on our transactions. Due to the efficiency and rigour of our underwriting processes, we're able to consider multiple collateral types – stock, debtors, plant and machinery, intellectual property, etc – rather than just defaulting to real estate. This sets us apart from other lenders and gives borrowers an option that is fit for purpose in this day and age of falling home ownership and increased co-working facilities.

Since our launch in September 2015, we've lent circa £450m (including deals that have been credit-approved and are being transacted) to entrepreneurs and mid-sized businesses – which has directly led to the creation of over 1,300 new jobs, 3,200 new homes and has helped add over £1.2bn to the UK economy.

So, we think there's something to be said about not neglecting the middle child.

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