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Enabling Access to Financing for UK SMEs

Castlelake’s specialty finance expertise also includes underwriting loans for commercial and industrial uses. Since 2005, we have invested nearly $3 billion in small balance loans across the spectrum from non-performing to criticized. Leveraging this expertise, we provided financing to small- and medium-sized enterprises (SMEs) in the UK1, an initiative informed by a recognition that these businesses have been disproportionally affected by COVID-19. The pandemic’s continuation had compelled local and national governments in the country to impose strict regulations that have negatively impacted small enterprises such as pubs and restaurants.

According to the National Federation of Self Employed & Small Businesses, SMEs account for 60% of all private sector employment in the UK. Despite this large economic share, Castlelake has observed that SMEs have faced challenges in obtaining debt financing ever since banks restricted their lending to the space following the GFC. To address this capital shortfall through a viable investment opportunity, we originated approximately $30 million in merchant cash advances to help approximately 4,500 businesses secure crucial financing, in partnership with a UK-based SME loan originator.

Castlelake engaged with the originator with an eye to its differentiated product. The originator offers short-term loans to SMEs through a revenue-sharing model that draws directly from borrowers’ revenues for repayment. Unlike conventional debt, businesses are not required to repay their debt if they are not generating enough revenue. Borrowers pay a share of what they earn, and if they were forced to close their doors in a lockdown, they could generally wait until they were allowed to reopen before resuming payments. Additionally, the product was originated using real-time data, enabling loans to be originated even during lockdowns, when some businesses, such as small convenience stores used loans to stock up on inventory.

Through our due diligence process, which involved probing for borrower complaints and reputation weaknesses beyond traditional compliance, legal, and financial audits, Castlelake found this revenue-sharing model favorable and affordable for borrowers while also enabling us to achieve predicted cash flow. Restaurants, bars, and pubs in the UK have been equally underserved during the pandemic. Castlelake has helped fund these establishments at a time of limited credit availability.

1 National Federation of Self Employed & Small Businesses Limited, UK Small Business Statistics, 2022.