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Non-bank lenders are fuelling mid-market growth opportunities

Daniel Smith, partner at Grant Thornton UK LLP, examines how the emergence of non-bank lenders are providing businesses in the mid-market with more opportunities for growth

Daniel Smith

The funding landscape for mid-market corporates has changed substantially over the last five years led by the proliferation of non-bank lenders. These firms, which lend to businesses but do not accept deposits, are not merely new entrants competing against the banks – they are instead driving innovation across the industry with a new and different offer to the traditional lenders.

Our research, which surveyed 100 mid-sized businesses and 100 non-bank lenders, recently revealed that 61% of corporate respondents have used a non-bank lender. But what benefits do non-bank lenders offer mid-sized corporates and do they face any obstacles to further growth?

Non-bank lenders (such as credit funds, private equity firms with a direct lending arm, junior debt funds, and asset backed lenders) earn their return by having their money at work. They mostly do not seek ancillary revenues from transactional services and hedging, which are essential profit streams for banks.

Perhaps more significantly, non-bank lenders can be attracted to alternative funding structures such as non-amortising debt, where a substantial portion of the loan is not repaid during the loan period, because the total interest they receive remains constant.

These bullet repayment structures can be hugely beneficial to a mid-sized business, as it opens up the possibility for them to invest more of their operating cash flows into fuelling further growth, rather than paying down debt.

As a result of benefits such as these, corporates have become increasingly aware of non-bank lending activity with virtually all corporate respondents (92%) thinking that these firms have been ‘active’ or ‘very active’ over the previous two years. In addition, non-bank lenders are viewed in an encouraging way by corporates with 79% of them agreeing that these firms are perceived positively or very positively.

However, despite this activity and the clear benefits non-bank lenders present, there still is a gap in understanding between the lenders and the corporates. In the past year, 15% of non-bank respondents have started more than 15 deals but only 2% have completed this number.

When considering why deals were not completed and what misperceptions need bridging, the following were highlighted in our research:

  • Four-fifths (82%) of respondents cite corporates’ unrealistic expectations as the reason that potential deals do not complete, followed by a lack of awareness and understanding of the problems that can underpin deals (41%)
  • A stereotype persists that non-bank lending is for a distressed company, however only 27% of non-bank respondents invest the majority of their funds in distressed corporates
  • Perhaps more worryingly– whether perceived or actual – is that non-bank lenders do not consider the business owners’ interests and are usually only interested in returns.

Despite these perceptions however, our research found that 45% of non-bank lenders are looking to invest over the long-term (10 years or more) and offer a range of interest rates from 5 to 15% with the majority (37%) settling at 10%.

These worries do however indicate that non-bank lenders need to do more to improve communications with corporates over these misconceptions. If they can tackle these misunderstandings there is surely room for further acceptance and growth, especially amongst the fast growing mid-market.

Posted on 1st July 2014 by



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