Please note, this information is for general guidance only and should not be taken as financial advice. Always seek professional advice before making any financial decisions. Your capital is at risk.
The UK business funding market is more diverse than it’s ever been, with a wide range of specialist lenders covering a bewildering number of specific niches.
The term alternative lenders is used to describe a large part of the non-bank funder market, but there are many different names used in many different ways to cover the different options available to borrowers. In this blog we cover some of the key differences between the two main types of alternative lender – challenger banks and debt funds.
Comprehensive Guide to Alternative Business Funding Options
A bank is generally funded by customer deposits and as such is regulated by the Bank of England, with licenses required to operate. Coming out of the crisis the banking market was opened up when banking licenses were made more widely available in order to help prevent a crash like that seen in 2007.
Whilst not all new banks have been successful, there are now well over 100 licensed banks incorporated in the UK, with many more based overseas but operating in the UK – these are now referred to as alternative banks, challenger banks or alternative lenders.
So what does this mean for the SME business owner seeking funding? The key message is that there are a large number of alternative bank lenders out there who are seeking to grow their market share and are actively looking for new customers. These lenders tend to be more customer focussed and will generally be looking to compete on a point of difference.
In this market there is no one-size fits all, when it comes to debt products there is likely to be a challenger bank that specialises in the type of debt being sought, they will often have more attractive terms and a better understanding of the product on offer.
How Challenger Banks Can Boost Your Business Financing
In many cases these challenger banks can sit alongside the mainstream banks to ensure minimum disruption to the day-to-day banking. Banks need cash deposits, ever more so with increasing regulatory pressure from the likes of Basel III – they aren’t a public service and they should be competing for your business. The alternative debt market, and challenger banks, ensure they can’t become complacent but borrowers need to be aware of the options open to them.
Whilst the challenger banks are less well known the Bank of England regulatory framework ensures they are held to account and provides comfort for those who don’t just take no for an answer.
The other main category of SME lender is private debt funds, or private credit. These lenders obtain capital to lend from a number of different types of investor – pension funds, insurance companies, professional investment companies amongst others. Essentially these investors pool capital into a ‘fund’, which is then invested by local or regional investment teams.
Like the challenger banks, each fund has its own specialism and will have raised capital from investors to do particular types of deal.
Lines of communication are often short, the type of lending is usually clear and the fund has one sole aim – lend money to SME’s and then manage that investment until the borrower repays. As a result the level of confidence in delivering the right result is often higher, and funding can be put in place much more quickly.
Knowing who you are borrowing money from is critical, any investor or lender will have a legal agreement that gives them certain rights, particularly if the business is struggling after the deal. Whilst a solution may appear cheaper or more attractive at the outset, understanding how that lender is likely to behave in the future can have a far bigger impact on the long term health of the business. The market for funding is now far more diverse, being clear on what the options are and the implications of different funding partners is more important that ever.
