Brokers should ‘double down and become experts’ in areas they understand – Rudge

Speaking to Specialist Lending Solutions about trends in the SME finance market, Rudge said any brokers operating in the sector should “double down and become really expert in areas that they understand. 

“I don’t think general brokerage – as it were – or trying to cover too broad of a base works that well.” 

Regarding brokers expanding into new markets, Rudge said most understood certain parts of the sector. 

He added: “They’ve got links with particular types of finance providers. The best thing they can do is not to overpromise, but to really focus on a particular area where they can become expert.  

“Properly understanding employee ownership trust, as an example. Not just the funding, but the legal structures that go with it. Any regulation and rules, the tax implications.  

“Understand the multiple facets of the type of financing you’re putting in place and therefore become an important cog in that overall wheel rather than just a finance provider across a broad range of things.” 

Trends in the market 

Rudge discussed trends he was noticing among the lender’s SME clients and said he had seen more businesses looking at employee ownership trust, which is where all staff have a stake in a company. 

Rudge said there was a “nice ESG angle” with this model as it also created a structure which allowed companies to exit by giving a majority holding to employees. 

He said: “We’ll provide the financing to the company to acquire some shares from the founder to be held in trust for the employees.” 

Rudge also mentioned a trend of firms looking to borrow on a venture debt or recurring revenue basis to invest in research and development or sales staff. He said this was particularly common among tech businesses. 

Additionally, Rudge said there was a “reasonable” amount of merger activity taking place, which tended to attract lower and middle market investors. However, he pointed out that it was getting expensive to raise debt to support merger and acquisition activity because of rising running costs such as wages and energy bills. 

The impact of higher rates 

Rudge went on to say that while much of the conversation around higher interest rates focused on mortgage costs, there were ramifications for businesses too as their overheads also increased. 

Rudge said: “Immediately, there’s a working capital requirement for the business, you need to put money in to get it going and cover expenses. Even on a fairly light model, businesses require capital to trade and the cost of that capital has gone up significantly over the last 12 to 18 months.  

“Then you look at input costs and there’s inflation, so materials are more expensive. Also, for businesses that are importing and exporting, it’s not as easy as it used to be and there are added costs.”  

He also said businesses did not have as much price flexibility as rising interest rates dampened consumer demand which tended to lead to a drop in prices.  

“Businesses are going to hurt too,” he added.  

Rudge said there were still opportunities to be had for businesses as there was more flexibility in the way SMEs traded, and because of changes in working practices they could attract staff more easily and scale up faster.  

He also said while there were changes due to Brexit, the “world was a smaller place” and international trade opportunities had opened up. 

Access to finance 

Rudge said there were options for micro enterprises and larger, corporate entities when it came to the provision of finance but when it came to scale up SMEs, most did not “quite fit the big banks’ servicing model”. 

He said: “They fall more into a call centre type proposition, which isn’t great for them because they’ve got all sorts of growing pains and the different ways they need financing to be organised. So, we set up to fill that gap. 

“We’re not as cheap as high street banks because it’s more expensive to provide that level of service.” 

Rudge added: “What we find is for those types of companies, if they are ambitious and want to grow then it is worth paying a little more for financing needs. They get a named relationship person and structure that works for them. 

“For most businesses, they know the plan they put in front of us isn’t exactly what’s going to happen. It might be better, it might be worse, but it won’t always be the plan they have.” 

Rudge said Shawbrook worked with businesses throughout the life of the company. 

He said the lender had a diverse range of products which covered different industries, including asset-based lending products which allowed companies to raise capital. 

“What we tend to find is that most UK SMEs will need external equity to grow at some point. Early stage businesses work with venture capital trusts and then raise money that way, then you’ve got more mature businesses that turn to private equity funds. 

“We tend to work alongside the companies and the investors at that point to give them a blend of debt and equity to execute those transactions. So that it’s not as expensive for the founders of the business compared to just raising equity,” Rudge added. 

Shawbrook primarily works with brokers that advise on asset financing within its SME division, while also engaging with tax and corporate finance advisers to collaborate on a solution for a client. 

As for the kinds of businesses Shawbrook tends to see in its SME division, Rudge said: “Over time, we found there have been more technology-related businesses in our portfolios because that’s just the way the UK economy is trending.  

“But we’ll still happily lend money to a manufacturing firm that’s been going for 100 years.”