2020-03-10
Legal Guides

Guide to alternative lending

Home / Knowledge base / Guide to alternative lending

Posted by Myles Bennett on 19 August 2019

Myles Bennett
Myles Bennett Associate

The financial services industry has changed dramatically since 2009, forcing many of the traditional banks to review their lending practices.

This has meant that some small and medium-sized enterprises (SME’s) no longer qualify for “traditional” bank lending.  This has opened up the market to alternative lenders, also known as challenger banks/ lenders.

What are alternative lenders?

Alternative Lenders are fintech-driven business lenders that sit outside of traditional banking space.

They offer various  types of lending, providing short term business loans, medium-term business loans, peer to peer, lines of credit, invoice financing, equipment financing and merchant cash advances (to name but a few).

Short-term business loans    

Similar to a bank loan,  these usually have shorter repayments ranging from a couple of weeks to 12 months

Medium-term business loans

Similar to a bank loan,  these usually have repayments ranging from a 12 – 60 months 

Peer to peer

Sometimes referred to as “Mom and Pop investors”, individuals wanting to invest their money in loans are matched with individuals or companies wanting to borrow on highly-automated “platforms”

Lines of credit

This is a specific amount of finance that the borrower can draw upon when needed, and may be used repeatedly if repayments are made in accordance with the lending terms

Invoice financing  This allows borrowers to sell their outstanding invoices in exchange for a percentage of the invoices up front
Equipment financing

This is the use of the loan to purchase or lease  physical assets used as collateral for the loan

Merchant  / business cash advances This is a loan where the borrower is effectively selling its future credit and debit card sales at a discounted rate, with repayments being made daily from a proportion of the daily card sales

Although many of the lending types listed above are available from the traditional banks, alternative lenders usually have more efficient and quicker approval requirements to provide business owners with an easier, faster route to the funding they may need to start, maintain or expand their businesses.

The operating costs of Alternative Lenders are significantly lower than those of the traditional banks, as their processes are streamlined and highly automated and they offer a much narrower product range.

The boom of alternative lending - who can use it?

Alternative lending is traditionally associated with SME start-up or expansion costs. But it can also be put in place to deal with a whole range of business-critical strategies for a variety of organisations: indeed the market has seen an increase in larger businesses seeking funding from alternative lenders for access to cash for mergers and acquisitions, IPO’s and development finance.

Upsides and downsides of alternative lenders (FEEDS)

Flexible

Alternative lenders are usually more flexible and will seek more imaginative ways to lend to borrowers, developing new methods of financing to keep up with demands.

The approval rate for alternative lenders is also considerably higher than that of the traditional banks

Expense

As traditional banks usually lend to borrowers with a long track record, they are able to charge lower interest rates as the chances of the loan not being repaid is relatively minimal. Alternative lenders, by accepting borrowers with a less established track record, are forced to charge higher interest rates in order to reduce their liabilities in the event of the loan only being partially repaid, or not repaid at all.  Although the short-term loans are usually a lot more expensive than traditional financing, on some products the costs are the same or, sometimes, marginally less.

Expiry

Some alternative lending types come with shorter terms and smaller amounts. In turn this means quicker repayment schedules (sometimes daily or weekly). However, not all types are shorter, with many taking the traditional approach of monthly repayments. It all depends on the type of lending the borrower opts for.

Diversity

Alternative lenders offer a variety of lending types  compared to the traditional banks and usually look for ways to lend outside traditional or “market standard” lending.

Alternative lenders are also more prepared than traditional banks to lend to “non-traditional” or start-up borrowers that would normally struggle to get funding elsewhere, with their credit teams seeking different ways to make the lending work for all parties.

Speed

Many alternative lenders have created simple, speedy application processes, involving less paperwork and requiring less information, saving valuable resources and time.

Decisions can be made in a matter of days (sometimes hours) unlike the traditional banks, that can take a few weeks to make a decision. Borrowers securing funds from an alternative lender can have the money in their account before some traditional banks have even considered the application.

Our banking and finance team is a market leader in the alternative lending sector, acting  for both borrowers and lenders and has contracts within each tier of alternative lending.  

About the author

Myles Bennett

Associate

Myles is a solicitor in the banking and project finance team assisting on many types of transactions.

Myles Bennett

Myles is a solicitor in the banking and project finance team assisting on many types of transactions.

Recent articles

03 April 2020 Coronavirus: Companies offered potential lifeline

All businesses are now operating in uncharted waters. The government is reviewing its support for businesses on an almost daily basis and, last weekend, the Business Secretary announced a proposed relaxation of the law around ‘wrongful trading’ for 3 months (see our guide for more detail) thereby giving directors of otherwise viable businesses space to see whether the package of government incentives will enable them to survive the pandemic. Alok Sharma also announced he was considering other measures, largely based on the government response to the proposed changes to the insolvency regime in 2018.

Read article
03 April 2020 Coronavirus: wrongful trading laws to be suspended

There will undoubtedly be many directors who, increasingly concerned about the solvency of their businesses and their potential exposure to personal liability for trading whilst insolvent, may have been considering whether to shut down during this pandemic. The UK Business Secretary, Alok Sharma, recently announced proposed new insolvency measures to suspend the laws on wrongful trading to offer some protection to business directors.

Read article
03 April 2020 Coronavirus: Impact on maintaining contact with care homes residents

A recent Court of Protection decision, BP v Surrey County Council & Anor [2020] EWCOP 17, highlights the difficulties now arising due the Coronavirus pandemic in maintaining contact with our family and friends, especially keeping in touch with those living in care homes. As many care homes have imposed restrictions on visitors, including close family members physically seeing their loved ones, Mr Justice Hayden ultimately had to weigh up whether it was in the resident’s best interests to remain at the care home or return home with a designated care package.

Read article
Contact
How can we help?
01926 732512
CALL BACK