Platform Lending to SME’s Extends Beyond Plain Vanilla Term Loans

Let’s wind the clock back ten years, to a time before the advent of Alternative Finance, when lending to small and medium-sized businesses was dominated, almost entirely, by high street banks.   

From the perspective of small businesses, the options seemed simple. Depending on circumstances and the requirements of the business, the bank would offer a term loan, an overdraft or a combination of the two.

But things were never really that simple. Certainly term loans and overdrafts were the most common solutions, but there were other options on the table. For instance, overdrafts were (and still are) extremely useful facilities for smoothing over any peaks and troughs in income during the trading cycle, but they have their limitations.

When a business scales up rapidly, there is frequently a requirement to spend upfront on servicing new customers while having to wait perhaps several months for invoices to be honoured. This can create a cashflow black hole that is greater than the overdraft limit.

To solve that problem, banks and specialist lenders offered a third option in the form of borrowing against outstanding invoices. This was more flexible, as the amount that could be borrowed rose in accordance with the value of the debtor book.  

A Broader Offer

And as businesses grew in size and ambition, new finance options opened up. A bank might offer some kind of ‘structured’ facility, bringing together a number of debt products that would between them meet the requirements of the business.

In addition to a term loan, overdraft and/or invoice funding, the package might also include a mezzanine finance element – each with their own characteristics and timelines.

The term ‘mezzanine finance’ covers a number of variations on a theme, but typically it is deployed in situations such as management buyouts or in rapid growth scenarios. Combining debt and equity elements, it is more expensive than conventional term loans but the repayment schedule is often tailored to ensure that borrowers make smaller payments in the early days.  These arrangements reduce outgoings at the stage when they are growing the business as a whole (or a particular venture) ahead of any future increase in revenues.

The Big Picture for Platform Lenders

The key point here is that business finance is about more than term loans and overdrafts and that becomes even more apparent when you move into sectors such as property development, where very specific solutions, such as bridging loans and development finance are the norm.  

Initially, platform lenders – often characterised as Peer to Peer (P2P) – were focused on just one type of product, namely term loans, but things have changed.

As the latest report from the British Business Bank (Small Business Finance) notes, around 52 per cent of small businesses are now aware of platform lending, and borrowing from Alternative Finance providers has grown rapidly to the point that it is becoming mainstream.

This creates an opportunity for platform lenders to offer a range of products that extend beyond the standard form of the term loan.

This is happening already. There are, for instance, a number of specialist invoice trading platforms. Equally, property lending has established a niche position in the platform lending market.

Alternative Menu of Solutions

But there is also an opportunity for individual providers to expand the menu of solutions available through their own platforms.

For its part, The Route – Finance has been rapidly evolving its offer, particularly in the field of real estate.

The Route – Finance can be more accurately described as a Private Debt Platform rather than a P2P lender. This is partly attributable to a distinct investment community. The Route’s investor base is comprised of High Net Worth Individuals, and is widening this to include family offices and institutional funds.

When compared to a typical P2P platform, the pool of investors is relatively small, but they are prepared to commit larger sums than their retail investor equivalent and they are looking for opportunities to secure superior returns.

That has made The Route’s platform ideal for ‘special situations’ borrowing, and increasingly it offers an attractive source of finance for entrepreneurs working in property development.  

The Route has been expanding its offer. In addition to term loans, bridging finance and development finance are now both available on the platform and a mezzanine finance facility can be packaged alongside the other options. Thus, capital can be secured a part of a structured deal.    

Stage one of the Alternative Finance revolution was the arrival of viable alternatives to high street banks in terms of simply making capital available. Arguably stage two will be a rollout of features and products that match the often complex requirements of business owners.

To find out more about The Route – Finance’s Private Debt Platform investment opportunities or secured loans call 020 3141 9040

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