SME event-driven finance is fast becoming the natural terrain of the alternative finance industry.
Banks have traditionally dominated all areas of business lending, but regulation over the past decade has forced banks to retrench. In the years immediately after the financial crisis, net lending to SMEs fell heavily into negative territory. Now, while banks have re-entered the market to a degree, Brexit has impacted, and they remain cautious around what their credit measures tell them are ‘riskier’ loans to businesses.
Alternative finance has significant structural advantages over conventional lenders when it comes to business lending. One of these simply stems from the fact that it’s new, and whilst most high street lenders have been around for many decades, so has much of their existing business. Alternative lenders don’t have this legacy back book, so can focus on supporting a client in the here and now.
Another advantage of newness is that you can configure business processes to specific and simpler requirements. Kenny Hughes, Scottish director of Regional Business Development at ThinCats, says: “We’re able to make a decision quickly. I work very closely with the regional head of credit. That has a lot of benefits.” Not least, speed of both decision and transaction.
More importantly over the long term, however, is the bespoke service alternative lenders are able to offer businesses. “Banks will typically offer a loan that is fully amortised over three or four years,” says Hughes. “But a particular business may need interest only, or a bullet payment. Altfi has more freedom to tailor the loans.”
Formally, a fully-amortised loan will be lower risk, but the implications of servicing this for a corporate borrower transitioning to a different management structure may mean more risk for the firm, and so greater potential to default.
Hughes explains: “Event-driven finance is not just about the numbers. Companies benefit from having someone with the expertise to structure a deal working alongside them. It’s about understanding what the management team is about, the story behind the numbers, and being creative in the solutions you can offer a management team.”
If this sounds like traditional business banking to you, you would be right. The paradox is that it’s increasingly difficult for traditional banks to service, through a combination of restrictive regulations and how new lending is conditioned by legacy business.
However, some alternative lenders are combining the skills of professionals with decades of experience working alongside SMEs and business models that are specifically designed to service this sector.
Event-driven SME finance will almost always need financing structured in a way that is unique to the business. That is where the benefits of alternative finance are clearest.
