It’s been only six years or so since the first peer-to-peer lending and crowdfunding platforms arrived to fill a vacuum created by the financial crisis. Since then, awareness of Alternative Finance has risen sharply. For many businesses today – whether seeking to borrow money or sell shares – an AltFi platform may be the first port of call rather than a last resort or a brave experiment. In a nutshell, the industry has come of age.
But if the Alternative Finance marketplace is no longer terra incognita, neither does it represent a totally familiar landscape. As the number of providers continues to proliferate, the challenge facing businesses and their advisers is to differentiate one from another.
From a birds-eye view, the market looks relatively simple. Businesses who want to borrow money gravitate towards debt platforms while those who want to sell shares opt for crowdfunding. The broad principles are well understood.
Look closer, however, and a more complex reality becomes apparent. No two platforms are exactly the same in terms of the markets they address and their business models. In other words, all of the platforms have their own unique selling points. It is only by understanding these USPs that businesses can make an informed decision when choosing the most appropriate platform to suit their needs.
In an increasingly crowded market, The Route – Finance stands out in part because its investors are all High Net Worth Individuals who are prepared to commit sums to support Small and Medium Sized Enterprises (SMEs). As such, The Route – Finance provides funding from a smaller pool of ‘Sophisticated investors’ than the majority of platforms. Indeed, rather than operating in the peer-to-peer lending space, The Route – Finance can be much more accurately described as a private debt platform.
The Private Debt Platform serves as the funding mechanism behind all Route loans. What makes The Platform particularly special is that investors who come on board with The Route – Finance agree to pre-mandate funds that will be used to support businesses that meet the agreed lending criteria.
The lending criteria against which enquiries are assessed leaves room for many different kinds of projects and situations. The key elements are as follows: short-term opportunities where the original sum, plus interest, is repaid within 6 to 24 months on requirements of between £500,000 and £10m. Typically, The Route – Finance makes funding available in complex situations, which require a closer look and personal considerations, which don’t appeal to traditional lenders.
This system of pre-mandated funding underpins The Route’s offer to SMEs. For instance, an investor pledges a set amount of money to The Private Debt Platform, with a maximum amount for each project. This simplifies the fundraising process, as money is committed subject only to the completion of due diligence, and The Route is able to determine and guarantee the funds available for the next project at any given time.
A Rapid Process
The process therefore goes quite quickly. The Route – Finance is able to make an ‘In-principle’ decision on incoming loan enquiries within 48 hours because the investor mandate is clear at outset. From there, the amount of time to drawdown depends primarily on the due diligence process as there is no need to go to the Platform to find investors for each project. Once the due diligence report is completed, investors need only confirm their participation, which has already been agreed in principle. It is very rare for a Route Member to decline participation in a project that has passed due diligence. It is ultimately a system based on trust, backed-up by the success of existing and repaid projects.
The structure of The Private Debt Platform benefits borrowers in a number of ways. The initial decision is fast, not least because the prospective borrower deals directly with the engaged and active team at The Route – Finance rather than pitching to a wide group of investors.
The entire process from provisional acceptance, through due diligence, and up to the release of funds goes quickly, as long as the borrower is forthcoming and accessible and third-parties are actively engaged. Borrowers can certainly expect the process to go quickly when compared with borrowing from a traditional bank. Once due diligence has been completed, there is no final stage where the application is scrutinised by, say, a credit committee. Because funds are pre-mandated, the project already has an implicit green light.
A key consideration for borrowers is also the assurance that funding will be delivered pending all of the necessary checks. Nobody wants to begin a funding process that won’t ultimately deliver. The Route Finance’s Private Debt Platform, with its pre-mandated investor funds, is unique in its ability to guarantee funds subject to due diligence, and deliver them quickly even with the most intricate projects.