by Simon Belton, director of BM Structured Finance
There has been much said in the press over the last few months about the decline in traditional bank lending to SME’s, and the Government’s failed attempts to rectify this.
To fill the void left by the Big Four banks a whole raft of new financiers have entered the market. This has brought the benefits of innovative products, new technology and quick credit decisions, and generated huge amounts of positive publicity. Little has, however, been said about any risks associated with these sectors.
Here, we look at the various alternative funders and discuss the risks to both the investor and the borrower:
Peer to Peer Lenders
There are numerous online crowd funding and auction sites, enabling corporates and private individuals to participate in equity, loans and invoice finance.
Asset Based Lenders
Whilst this can be seen as one of the more mature alternative finance options, the competitive nature of the sector has seen the lenders looking to differentiate themselves by expanding the products they offer, or launching specialist products such as:
– Construction finance
– Single invoice finance
The Asset Based Lenders can also package a deal to include financing non-receivable assets, plus add in trade finance and short term cash flow loans.
A number of new banks have launched in the past few years and, whilst only one has developed a retail footprint, they have all been successful in offering products in the property and Asset Based Lending sectors.
Trade Finance/Purchase Order Finance
A number of new Trade Finance houses have entered the market, and these companies can either purchase the goods (raw materials or finished products) on behalf of a company, or pay their suppliers direct on terms of up to 120 days.
Supply Chain Finance
Supply Chain Finance or reverse factoring is where a large corporate, or its finance partner, offers a range of payment options to its suppliers to support their working capital needs.
Bridging and Development Finance
The boom in property prices in London and the South East has seen the emergence of specialist Bridging and Development Finance companies. Rates are high, reflecting the risks associated with this type of lending and the short term nature of the loan.
Whilst it is commendable that small financiers and private investors have stepped into the corporate finance market, there are risks to both the investor and the borrower, such as:
– The Alternative Financiers are, in the main, providing funding to businesses that have a higher credit risk. Whilst this is admirable, failure rates and losses are bound to rise when the current benign economic conditions pass. Not all the Alternative Financiers will survive this.
– Investors may not fully understand the risks associated with the transaction, as decisions are sometimes made on the financial performance of the company and/or its customers, rather than the quality of the underlying security.
– A number of the financiers have back to back finance arrangements with the Big Four banks and this may affect their ability to grow. It may also place constraints on their ability to underwrite some deals.
– Alternative Financiers sometimes only provide some of the company’s finance, and their security requirements do not always reflect the increased risk.
– The costs of some facilities can be high.
With the wider variety of options available for raising finance, bringing with it a greater degree of risk, it’s important to consult an independent finance brokerage who will provide impartial advice on all aspects of business finance, and advise and assist in sourcing the right financial products suited to your specific needs and risk profile.
Simon Belton is a director of BM Structured Finance, and has over 25 years experience in the Asset Based Lending sector. Simon has held senior positions in Credit, Risk and Sales and has worked for some of the major financiers both in the UK and abroad. His specialisation is in understanding the finance needs of the SME sector, and working with financiers to ensure that facilities fully meet the needs of his clients.
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.