By Altenburg Advisory

Funding for Lenders and the Wholesale Funding Journey

Since the banking crisis a decade ago the non-bank financial sector has become an increasingly important part of the SME financing market. However, to continue their growth trajectory non-bank financing institutions (NBFIs) will need to acquire additional funding. This article looks at the rise of NBFIs and how they can best obtain the right funding they need to grow.

Emergence of the Non-Bank Financial Sector

The rise of NBFIs can be traced back to the global financial crisis when the UK began its “Quantitative Easing” (QE) Program. Since the global financial crisis in 2007-2008, the UK government has pumped almost £900bn of liquidity into the UK economy as part of its QE program.

Originally, QE was designed to stimulate spending in the UK economy by ensuring interest rates remained low and inflation was maintained within target levels. Through the purchase of UK government bonds or corporate bonds, the Bank of England is able to increase bond prices and thus drive down interest rates.

Bank of England Bond Purchases

As a result of this QE program, the issuers of government bonds, typically financial organisations, looked for wider opportunities to deploy the QE liquidity, this in turn led to a proliferation in the number of non-bank financial institutions (“NBFIs”) and speciality finance companies (“SFCs”).In the aftermath of the financial crisis many traditional UK lenders became progressively more “inward looking”, repairing their balance sheets and focusing on regulated capital ratios. The alternative lending market stepped into the frame, and provided much-needed funding to UK SMEs, mid-market and large corporates which were neglected by the traditional banking sector.

The growth of the alternative lending space has developed across a wide variety of lenders, ranging from early stage fintech platforms to more established regional and national players. Alternative lenders provided a range of different funding types – from lease and loan facilities to small businesses and consumers, early stage growth capital and venture-debt type funders, through to secured lending (invoice discounters and Asset Based Lenders), as well as bridging and development finance.

NBFIs are now a fundamental and crucial source of finance for UK businesses that are looking to grow, as the traditional banking sector continues to focus on developing low risk loan books with enhanced ancillary income opportunities – maximised income for minimal risk.

It is estimated that there are c.400 alternative lenders / credit funds operating out of the UK alone, with c6,000 across Europe. (Statista)

Funding types available to NBFIs/SFCs

Of course, NBFIs and SFCs also need funding themselves. The funding options available to NBFIs and SFCs will depend on the quality and performance of their loan book (which is the security on offer for a lender), how long the business has been operating and/or the prior experience of the management team in that business.

The table below summarises the options that are typically available to NBFIs and SFCs:

How advisers can help

For lending businesses to successfully raise capital they need to know the right types of funders to approach for the current stage of the business, how to best present the business to potential funders, and the key information that lenders will require to make a credit decision.

Having appropriate advice from a debt advisor with significant prior experience of successfully completing these type of funding transactions can thus be crucial.

In addition advisers can also help when exploring options for the capital structure, for example when assessing options around senior only structures, or combined senior and junior facilities.

ACP Altenburg Advisory is part of ACP, a leading independent debt advisory association for SME and mid-market companies, advising clients on the options available to them and providing hands on support from day one all the way through to drawdown.

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