2017 saw the continued emergence of Alternative Finance as more new lenders entered the market. It is difficult to believe the rapid rise of Alternative Finance which, according to UK Finance’s September 2017 report, grew again in the year to September 2017 by 4% and shows no signs of slowing down and as the supply of funds from the traditional High Street Banks continues to be squeezed, the Alternative Finance market is taking advantage.
What has led to the emergence of an Alternative Finance market?
5 up and coming Alternative Finance lenders
Other players are seeking to exploit the retreat of the traditional lenders from the high Street. I believe these can be split into 5 key areas.
Asset Based Lenders
Probably the first of the Alternative Finance market, and the largest, ABL providers initially provided just Factoring and Invoice Discounting but are now likely to provide a much greater product range covering all tangible assets. More recently we are seeing the emergence of spot factoring or single invoice finance and even facilities being provided against intangible assets. The dominant area in the Alternative Finance market.
Challenger Banks
The UK continues to see an emergence of challenger banks as more banking licences are given out by the FCA. As you would expect in the digital world we now live in, most of these are online and new banks are still coming online, the most recent being Atom and Monzo Banks, currently aimed more at the retail market but with plans to go into the commercial market.
However, not all challenger banks decided to go down the online only route. The emergence of both Handelbanken and Metro have shown that the High Street model isn’t necessarily over for good although with more flexible opening times, a local relationship manager and incentives to go into the store (bowls of water for your dog!), this is the new version of High Street Banking.
Other challenger banks have also decided to focus on a part of the market that has been neglected by banks, SME lending, which due to increased regulation and cumbersome processes has become unlucrative for banks. Oaknorth, has managed to grow its loan book to £800m in just two years, as off November 2017, and has the aim to deploy an extra £1.5bn.
Crowdfunding
Probably the newest entrant to the market, Crowdfunding has become a popular way for the general public to lend money to companies seeking significantly better returns than what they will see from their Bank. However, don’t be fooled into thinking it is only the public putting funds into Crowdfunding, this is a popular method of investing for High Net Worth’s, family offices, Venture Capitalists and even High Street Banks!
However, will new and improved regulation of the Crowdfunding market temper its rise over the coming months? Watch this space.
Bridging providers
Like most of the digital world, everybody wants everything now. Leaving it too late to seek finance may lead you to the Bridging providers, an expensive but essential market providing finance quickly against suitable security, usually property. Whilst fees are higher for this product, you can borrow against your property in difficult circumstances or at speed with large loans potentially taking less than a week to put in place.
Investors / Debt providers
The distressed market comes with opportunities for a number of lenders and investors who can use their own expertise to help a business through a difficult period. This help could start with the offer of debt and / or equity as well as hands on help and advice. Like Bridging Finance, this is unlikely to be cheap but could lead to all stakeholders sharing in an upside.
The upper end of the market (targeting >£20m tickets) is getting overcrowded, with dry powder of European focused direct lending funds reaching a staggering $35bn, leading to riskier deals that are becoming “covenant-lite”.
What does 2018 hold for the Alternative Finance Market?
More of the same? Whilst new regulation is expected, particularly in the Crowdfunding market, new entrants to the Alternative Finance market continue to appear and the product range widens with each new entrant. Unsecured lending for SME’s, without personal guarantees, are now available as are facilities against individual invoices, supplier finance and intangible assets. The surge of the Alternative Finance market continues.