One of the biggest stories affecting the UK banking sector over the last couple of years has been the rise of the alternative lending market. This market has sprung up to meet the demands of the growing and dynamic SME space which has suffered greatly at the hands of banks who are maintaining ever stringent lending criteria. In fact, big bank lenders approved a record low 14.8% of small business loan requests in 2012. The UK’s alternative lending market grew from £492m in 2012 to £939m in 2013, a rise of 91% in one year!
So what exactly is alternative lending? Alternative lending is a broad term used to describe the wide range of loan options available to consumers and business owners outside of a traditional bank loan. These alternative options are most commonly used when an individual or business owner cannot obtain a traditional bank loan for any number of reasons. Alternative lenders specialize in utilizing overlooked sources of collateral such as real estate or even outstanding invoices to secure the loan. They are typically more flexible than banks when it comes to repayment schedules and loan approval and often provide cash much faster than their traditional banking counterparts. The alternative lending industry is well-established and staffed by well-respected members of the financial services community.
So who are these alternative lenders? It depends on the sector really. For most sectors outside of Real Estate Finance some of the lenders can be quite difficult to find as they do not market themselves as much as banks and tend to be SME businesses themselves. In Real Estate Finance for example, competition to provide finance is fierce at the moment, with margins for lending institutions being pushed down as a result of a large pool of enthusiastic lenders eager to do business. This however is at the top end of the market. As banks will only lend at a relatively low loan to value, a large number of alternative lenders or “debt funds” have sprung up to offer a broader range of loans such as stretched senior loans, mezzanine finance or equity investment. This enables investors with less cash at hand to make their investment. These debt funds are funded by a range of private investors, hedge funds and mainstream institutional investors.
In the multi-sector SME market, there has been an influx of high finance professionals settings of firms who are providing a bespoke service to borrowers. These individuals will typically have superior contacts in the high net worth and hedge fund community which they can tap into to provide funding for their clients. To some this may seem like growth in the loan brokerage market, however these firms are able to originate and structure deals of superior quality and within the risk parameters set by their clients. The advantage of them is they can give borrowers access to an “off market” pool of lenders as well as providing unparalleled expertise in risk analysis and pricing. This sets them apart from traditional brokers who match borrowers with established lenders. One notable example of companies providing this service is CreditSquare, set up by Bjorn Lindvall and Charles Thorburn.
It will be interesting to see how this market develops over the next few years as it has serious implications for the overall economy. The government has showed some very strong support such as co investing with peer-to-peer sites and putting money into direct lending funds. In the United States the balance between bank lending and lending from Institutional/Fund Management market has for a long time been well balanced, when in Europe, pre-crisis is was something like 95%/5%! All the signs point to the sector flourishing in the coming years and being given the credit it deserves (excuse the pun), for providing small businesses with the opportunity to grow.