What should non-bank lenders consider when seeking capital to grow?
Non-bank lending has evolved into an increasingly important source of finance for UK businesses and consumers, but without access to depositor capital, how can non-bank lenders expand their funding lines and support their clients? Warren Mutch, Head of Speciality Finance at Shawbrook, outlines the key considerations for non-bank lenders when seeking capital for growth.
During the last decade non-bank lending has evolved from relatively niche market into a crucial source of finance for UK consumers and businesses1.
As the non-bank lending eco-system evolves, and non-bank lenders look to expand their platforms and loan books, what capital pools are available to help these businesses grow, and what are the key considerations when seeking capital for expansion?
Exploring the options
Although non-bank lenders are issuing loans, they do not fund these loans through consumer deposits, and have not secured ‘deposit taking’ status with the regulator. This means that non-bank lenders have to tap other lines of capital to fund their businesses.
Recycling the proceeds from existing loan portfolios back into new deals and growing organically is one option. There are, however, capital providers who are active in the market and can offer financing that enables non-bank lenders to scale up their platforms at a significantly faster rate than relying exclusively on organic growth.
One proven funding pathway for non-bank lenders is partnering up with a speciality finance provider. Speciality finance providers, like Shawbrook, supply committed and uncommitted funding lines that enable non-bank lending clients to ramp up their loan books.
Shawbrook, for example, will typically advance between 70% and 90% of the principal balance of the loan receivables.
What to consider before taking on capital
Before taking on additional capital to fund growth and scale, there are four key questions for non-bank lenders to consider before seeking financing:
1. Do you have the right management team and reporting systems?
It is important for non-bank lender management teams to demonstrate a mix of skills. A fintech non-bank lender, for example, should have exceptional technology skills, alongside the lending and underwriting experience. A good blend of lending and operational experience is a fundamental starting point.
It is also imperative to evidence good reporting and cash flow management processes. As you can imagine, managing cash out for new loans and cash in for redemptions can be complex to balance.
A speciality lender would expect the business to have robust processes, with clarity on who is leading the finance function, collections and customer servicing.
2. Is your loan book firmly established?
A speciality lender would expect non-bank lenders to provide at least a year’s trading track record to demonstrate that they can originate safely and profitably in their market. While it can be product dependant, typically we would expect the loan book to be at least £5m.
Speciality lenders will review the non-bank lender’s single unit economics. What is the cost of borrowing, staff, and operational costs, and what is the buffer for bad debts? Is the lender then charging a rate to clients that puts them in a profitable and commercially sustainable position? Naturally, those at the early stages of lending are unlikely to have built the necessary data in their portfolio, however thinking about outside capital early on and building the reporting tools to answer these questions can help when the business is more established.
3. Do you have specialist expertise and a strong network in your target market?
The route to market for most non-bank lenders will be via the broker market, so having good relationships with brokers who can bring the lender high-quality business is key.
In some cases, lenders have been successful in going down the direct route, but that can be expensive to acquire new customers and difficult to execute in a small organisation. Most non-bank lenders will have broker-originated business models as a starting point.
This gives capital providers the confidence that a non-bank lender can continue to consistently originate opportunities over time.
4. Do you have strong relationships with credible advisory and legal groups?
How non-bank lenders work with their clients and adhere to regulation, which is constantly evolving, is crucial. For a small non-bank lender that doesn’t have a sizeable in-house compliance team, having expert legal and advisory support on hand to provide counsel on regulatory and compliance matters is fundamental.
Long-term relationships with experienced advisory groups and law firms are not just valuable with respect to compliance, they can also be beneficial for the overall development of the non-bank lender’s organisation.
When the time comes for a non-bank lender to consider an acquisition or exit, and there is a requirement for event-driven funding to support these plans, a long-term partnership with a trusted adviser to support the business can prove invaluable.
Taking on additional funding can supercharge a non-bank lender’s growth, and by addressing the above mentioned considerations in advance, non-bank lenders can put themselves in the strongest position possible to secure financing and scale their platforms.
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