Here, Damon Walford, Chief Development Officer at alternative lending industry pioneers ThinCats, shares his thoughts with Finance Monthly on the merits of alternative finance.
According to Altfi’s latest statistics, the alternative finance industry has originated a total of £8.7billion in loans, and there are currently almost 40,000 companies benefitting from the funding offered by this innovative and fast-growing sector. But why should businesses in need of funding approach such a platform rather than going down the traditional route of a bank loan? There are many answers to this question, but the overarching sentiment from the many and varied businesses that ThinCats has helped over the years is that it offered them a more personal, accessible and human service than they would have received through traditional means.
In discussing the benefits of alternative business funding, it’s important to set the context as to why the sector thrived so soon after emerging. Not long after it came to exist in its current form, we were struck by the financial crisis and most banks effectively pulled up the drawbridge and shut the gates on businesses looking for funding. Naturally, this created a major problem for ambitious SMEs looking to grow, but equally presented a huge opportunity for alternative finance. By offering small businesses a much-needed lifeline, the industry began to establish itself as a worthy alternative and a decade later, thousands of UK SMEs are testament to this.
One major point of difference between an alternative finance platform and a traditional funder is flexibility. For example, a bank’s lending criteria can be governed by a number of factors that don’t necessarily reflect an applicant’s deservedness of a loan; some big lenders take into account how much capital they’ve lent in a particular sector and a business can be turned down if it has reached its designated limit. Such a stringent approach inevitably results in worthy businesses being turned down for loans. Alternative finance platforms, however, aren’t limited by such criteria and can judge each applicant on its merits, on a case-by-case basis, taking a more personal, realistic approach to the transaction.
Alternative business lending also fulfils a large range of loan types from MBOs and growth capital to cashflow lending, across all regions and industries across the board, from the motor trade to renewables, IT, social care and everything in between. It therefore opens avenues for growth, development and expansion that are not recognised by some traditional lenders.
ThinCats are unique in using a network of business finance specialists who work as loan sponsors to help review borrower proposals. A loan sponsor can be a single individual, but more typically consists of several advisors with significant experience in finance, who are there not just to say ‘yes’ or ‘no’ to a business, but to help loan applicants make their case and be confident in their application. They take on the vital task of presenting the funding application accurately and specifically, allowing the business owner to continue running their business whilst providing investors with vital details on the investment opportunity. And by acting as the primary point of contact for the business, borrowers are given a personal touch which doesn’t always exist within the framework of bank business lending.
Furthermore, ThinCats has developed an award-winning, multi-layered, risk assessment model to give UK SMEs more than just a number crunching, ‘computer says no’ experience, whilst also protecting the interests of the lenders. The credit grading model consists of an in-depth, balanced analysis of a company’s financial health and dynamism, and is complimented by the security grading, determined by the asset to loan ratio. These scores are combined through multivariate analysis, and then professionally qualified by the credit team, giving all applicants a candid and fair opportunity to access funding.
A number of the worthy businesses that have borrowed via the ThinCats platform have been declined by banks, for one reason or another. Take Jack Norgrove, for example. An experienced member of the building and construction industry, Jack identified the promise in a plumbing and drainage supplier in Kidderminster, and put a proposal together to buy it out. When the bank he was talking to declined the deal due to insufficient security, he went looking elsewhere.
He was put in touch with a business consultant, who took the proposal to ESF Capital, major shareholder in ThinCats and sponsor to the platform, to discuss accessing an alternative business loan. The consultant was able to demonstrate that it was a solid business with a good track record and ESF and ThinCats concurred. The loan was listed on the platform and filled on schedule, allowing Norgrove Building Supplies Ltd to officially purchase the business, and immediately start implementing the development strategy, thereby making the most of a profitable situation in a timely manner.
For many business owners who have borrowed through alternative finance, it’s the very different nature of the platforms which offers the benefit and acts as the draw. Alternative lending firms are more independent than high-street lenders and offer more transparency for borrowers and lenders. On such a platform, if your business appeals to investors, you will be able to raise a loan and have it fulfilled. For many borrowing businesses and lenders, this ability to access investors directly is one of the main appealing factors; the social element of being able to witness investors compete on the platform to back your business with a loan, and become an advocate of your brand, and potentially a loyal customer.
A major benefit for businesses looking to borrow is speed. These platforms are generally much smaller organisations than big corporates, so naturally there can be a more hands-on approach from the outset when it comes to dealing with potential borrowers. With a tighter business framework, there are also less hoops for applicants to jump through, and complicated and unnecessary covenants and conditions are reduced. The time taken from a business first contacting ThinCats with an application to drawing down of the loan is a matter of weeks rather than months, enabling company owners to make the most of business opportunities as they arise.
Alongside these benefits, the alternative finance industry is able to offer competitive interest rates as well as flexible terms when it comes to loans, such as a choice of security terms, a range of repayment options or no early repayment charges, which may not be the case with some traditional loan providers.
ThinCats is one of the pioneers of the industry, and has recently had a record month, setting the scene for a record quarter; with an incredibly diverse pipeline of loans in prospect, it shows that the alternative lending industry is incredibly buoyant, and provides opportunities for SMEs and investors across the board.
The developments and investment that have come with strong institutional backing behind the industry has meant that early niggles have been ironed out, and the sheer volume of loans, investors and borrowers demonstrates the strength of the sector. Borrowing businesses can now have peace of mind that the major players offer an alternative funding package that is worth considering, even before approaching a traditional lender.