Before financial crisis hit the country, the British Banks were known to dominate all the areas of small business loans. However, things have now changed and for good.
Due to regulations imposed over the past few decades, it has made the traditional British banks economize. The year after the financial crisis began, the total lending to SMEs dropped to negative. Although the banks have now retained themselves to a certain position, they have remained cautious regarding their credit measures – especially when it comes to business loans.
There have been several cases where business owners have complained regarding their traditional banks being reluctant against lending them a small business loan. It is true even for event-driven deals such as the
- Bimbo and
- Growth finance
Despite the fact that these deals can be asset backed, cash flow or a mixture of both; when it comes to practice, they are more cash flow based.
Alternative finance industry has been readily filling in the gap left by the traditional banks. Over 72 per cent of the UK SMEs are backed by the alternative finance firms. In other words, more than 33000 businesses across the country use alternative finance channels as a way to secure funds every year.
The Structural Benefits
Although alternative financing sounds like high-tech people trying to run software platforms, in reality it involves professionals who are more down to earth. In fact, alternative financing has structural benefits over any conventional lenders – especially when it comes to business lending.
One of its obvious benefits is the fact that it is new. Most of the traditional finance institutions, some of them going back to the era before the invention of computers, have a legacy and have rules they follow while deciding to help a business financially or not.
Alternative finance firms do not have a legacy to fall back on and hence they believe in working what is in front of them and according to their client’s personal needs.
Another advantage of not having a legacy is that you get to develop lending processes that are specific to a company and have simple requirements compared to the complex processes of the traditional institutions. Additionally, alternative finance firms are quicker when it comes to taking a decision and processing the transaction.
Up-close & Personal
Today, the alternative finance lenders are able to offer businesses with bespoke services. Initially, it is in co-relation with the basic structure of the loan. Traditional banks often offer loans that are fully amortised for over 3-4 years. Alternative finance firms on the other hand have the freedom to offer loans tailored for every business.
This is with respect to understanding of the risk. A fully amortised loan offers a lower risk since the lender’s capital at risk will decline to zero over the lifetime of the loan. But when it comes to offering this service to a corporate borrower, it transitions to a different management structure which is riskier for the firm. So to ascertain this risk, it is important for lenders to know how each business functions.
You should know that event-driven finance is not only about the numbers but it is also in the company’s benefit to have an expert to structure a deal which works specifically for them. It is also about understanding what the company’s management team is about.
Conventional leaders usually have a tick-box approach. In the end, it all fall backs to understanding the story behind the numbers and being creative in the process that is offered to the management team.
Does it sound like traditional banking institutions to you? Then yes it is.
The irony is that it is becoming difficult for traditional banks to service, especially with the restrictive regulations and how the new lending is conditioned by legacy businesses.
But when it comes to alternative finance firms, they are combining the skills of experts (with decades of experience in working alongside SMEs) with the business models and are designing services specific to a business.
Apart from out-competing the traditional banks at their very own game, the alternative finance firms are also filling in the gap left by the banking institutions. As far as we know, the event-driven SME finance will always need capital developed in a way which is unique to the company. This is where the benefits of alternative finance are clearest.