Alternative finance platforms are enabling lenders to fuel small and medium-sized firms like never before, writes Chris Roberts, head of origination at Code Investing
As a former high-street banker, I took a while to believe what I was seeing when I first encountered the idea of genuine “unsecured debt“. The term has many definitions, but in this case it means exactly that – no personal guarantees on loans, no debentures and not a warrant in sight.
Small and medium-sized firms in the UK are set to benefit the most from this development. It’s being driven by large institutional investors that, in their search for better yields while interest rates remain so low, believe British SMEs offer the right level of risk and return.
They’re not shy to get money into the market. One of Code’s partner institutions, for instance, is offering unsecured loans ranging from £500,000 to £5 million.
They’re delivering the funds more quickly than ever, too. Some institutions have cut the time between engagement and completion to 35 days, compared with a market average of about 18 weeks.
What a difference a month makes
If you have an urgent business transaction to fund, the ability to complete a loan in barely more than a month can make all the difference.
It certainly did for Apex Prime Care, which recently obtained a six-figure, eight-year loan facility through one of our institutional partnerships in just over four weeks.
The Hampshire-based homecare provider is using the money as acquisition finance. Its MD, Malcolm Patrick, notes that the lending team “went out of their way to quickly understand our company. In view of the tight timescales involved, everyone ensured that they were available to work on our project as and when required. They made the whole application process speedy and seamless.”
Such rapid completions have been made possible by alternative finance platforms (AFPs). Lending institutions use these to do all the heavy lifting, from origination through to final credit sanction.
Using powerful tech to crunch key figures – including management accounts and, where necessary, financials from Companies House – AFPs can inform an applicant very quickly about their chances of success.
Once an applicant receives an agreement in principle, the AFP’s experts will meet the company’s management team and drill down into the heart of the business.
This combination of artificial and human intelligence is not only slashing completion times; is it also transforming the application process.
The availability of reliable real-time financial data in this open banking era heralds the development of a market in which AFPs are able to issue multiple term sheets to one SME.
Making the process slicker still, the AFP will liaise with the SME’s accountant or engage a corporate finance adviser to help collate the necessary information.
This frees the management team to focus on running the business. SMEs can also cut costs by paying a flat access fee (no arrangement charge from the institution) and opting for the AFP to perform due diligence in-house.
These types of loans are used predominantly as growth capital rather than for standard refinancing purposes. But firms are also taking them out for transactions such as management buy-outs, particularly where private equity funding is not an option.
The institutional lenders working with AFPs such as Code are generally ready to lend to ventures in any sector. We’re currently arranging finance for businesses in industries ranging from construction, manufacturing and retail to higher education, consulting and recruitment, for instance.
The provision of unsecured loans by institutional lenders through AFPs is set to reshape the business finance landscape. For British SMEs in particular, this promises to make obtaining growth capital a swift and painless process.