Alternative funders and the changing the role of high street banks

Traditionally high street banks were a one stop shop for a business’s financial and banking needs. They provided day-to-day banking services (deposit accounts, payments, merchant services etc) as well as providing funding (overdrafts, loans, asset finance etc).

However, this is no longer the case. Just as businesses are looking to alternative providers for services such as foreign exchange and merchant services, businesses are increasingly using Alternative Funders to achieve their funding objectives. Here I use the phrase ‘Alternative Funders’ to refer to non-high street banks, which includes P2P lenders, credit funds, alternative banks, Family offices and other specialist lenders.

So, why are an increasing number of businesses using Alternative Funders?

When a business is looking to borrow money, whether that be to fund growth, provide additional working capital, or to fund an acquisition or a shareholder buyout, the focus should be to obtain the most appropriate funding solution.

The key word here is appropriate. While cost is and should be a key consideration, it is important to evaluate the true cost to a business of any debt financing facility (in an article I wrote in March I discussed my views on the true cost of debt financing https://www.linkedin.com/pulse/debt-financing-true-cost-daniel-barrett).

Alongside the cost of any debt financing facility, there are many important considerations that need to be evaluated when considering a new debt financing facility. These will be different for each business, but often include;

  • The size of facilities;
  • The flexibility of and headroom in a new facility;
  • The repayment schedule (and the subsequent impact on cash flows);
  • The application process and time taken to get a new facility;
  • The potential disruption (internally and externally); and,
  • The ongoing reporting requirements.

It is in these areas where Alternative Funders are significantly differentiating themselves from high street banks.

So, while it is true that Alternative Funders are generally more expensive than high street banks on a headline rate basis, more and more businesses are finding that the most appropriate and attractive funding solution for their business is from an Alternative Funder. Key attractions of borrowing money from Alternative Funders include:

Mandate to lend

Due to government and Basel regulation High Street Banks have become increasingly risk-averse, resulting in much conservative offers of funding. Alternative Lenders, by contrast, have mandates to offer flexible loans that work better for the borrowing businesses. This includes offering larger facilities (relative to revenues and profitability) as well as greater flexibility around repayment (longer amortisation periods as well as partial amortisation profiles or interest only facilities).

Less restrictions

A loan from a high street bank is often coupled with financial and operational restrictions (covenants), and cumbersome reporting obligations. Alternative Funders recognise that the business owners should be focused on running their businesses and as such their loans usually have less onerous restrictions, covenants and reporting requirements

Timing

Unlike the high street banks, Alternative Funders can make swift credit decisions, provide greater certainty much earlier on in the process, and release fund to a borrower in weeks rather than several months. This allows businesses to move quickly to take advantage of business opportunities (such as an acquisition or a new contract) and reduces the time a business is distracted by a refinancing process.

Funding from Alternative Funders can sit alongside a business’s current bank

Most Alternative Funders do not offer day to day banking services. As such, when borrowing money from an alternative funder there is normally no requirement to move away from the current provider of day to day banking services. This avoids any disruption from needing to switch banks, and allows a business to keep a good relationship with their day to day banking provider. In fact, we are increasingly seeing high street banks being supportive of businesses borrowing from Alternative Funders where the high street bank cannot meet the funding requirement. This makes a lot of sense, as the bank gets to keep the day to day banking and is then in prime position to refinance out the alternative funder at the appropriate time in the future.

With an increasing number of Alternative Funders in the market, business owners have never had some many debt funding options to choose from. Because of the differentiated and attractive offerings of Alternative Funders, we are seeing an increasing number of businesses using Alternative Funders to achieve their debt funding objectives, often alongside their day to day banking provider.

At CreditSquare we work with businesses looking to raise between £1m and £30m of debt funding, and support them in determining, sourcing and implementing the most appropriate debt financing solution.

 

CreditSquare Ltd,

Phone : +44 (0) 20 3289 2176

Email : theteam@creditsquare.co.uk

Web : www.creditsquare.co.uk

1 Comment

  1. james says:

    hey very nice video thanks for sharing with us as a financial adviser in one of the best company in UK i have seen most of the people are facing the many problems because of lack of financial debt management I think it will help a lot and the way you are explaining is good and very clear keeps going

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