Since the financial crisis began, companies and individuals have been turning to non-bank lenders for flexible finance more than ever before.
In the UK and mainland Europe, the number of deals between non-bank lenders and mid-market companies rose by 43% between 2013 and 2014, and the trend continued in 2015.
If you need guidance that can help you to take advantage of this increasingly popular finance option, the commercial finance specialists at First4lawyers can help. Contact us for a no-obligation discussion about your situation.
What are alternative lending structures?
Alternative lending structures are any form of finance that doesn’t involve a traditional bank loan.
Since the financial crash of 2008, banks have been less willing or able to provide reliable sources of funding for businesses, and a variety of alternative options have been developed to fill the gap left by the banks.
This approach can make it a little trickier to be certain your borrowing follows legal requirements exactly, however, so it could be wise to speak to a solicitor experienced in the area via First4lawyers before you commit to anything.
Amongst these options are funds set up by ex-investment professionals who have diversified into new markets and bought out debt funds through mergers with other firms, or acquisitions of those funds.
Other forms of alternative lending structures include peer-to-peer lending, whereby a financial matchmaker, usually via the Internet, brings borrowers and lenders together for a mutually beneficial lending agreement. These matchmakers find individuals or businesses seeking to make a good return on their savings and lend money to borrowers who will benefit from a lower borrowing rate than they would get at a bank.
Crowd funding is an alternative lending structure whereby individuals are brought together in large numbers to lend money to business. Crowd funding websites have become a very popular way for start-ups to get off the ground, but they can provide a useful source of finance to any established business too.
What are the advantages of alternative lending structures?
Alternative lending from direct lenders offers greater flexibility to borrowers than loans from traditional banks, while the lender benefits from high interest rates.
Peer-to-peer lending brings the benefit of lower fees for borrowers, and no early repayment penalties that banks often impose. Funds tend to be more readily available through peer-to-peer lending websites, so you can access the money you need quickly, with greater flexibility than you would get at a bank.
Crowd funded business loans offer similar benefits to peer-to-peer funding, giving borrowers fast access to money amounts of all sizes, with advantageous terms and no early repayment fees. For lenders, crowd funding is an opportunity to back businesses with the potential for high rates of return and the option to access those returns quickly in some cases.
Consulting with a lawyer who has finance law experience can be a good way to work out which route is best for your business.
What are the disadvantages of alternative lending structures?
The main disadvantage of alternative lending structures for borrowers is the higher rate of interest that you will be required to pay in most cases. To give lenders the incentive to provide you, the borrower, with fast access to large funds, crowd funding and peer-to-peer websites could charge interest rates of more than 7% in some cases.
Crowd funding can be risky if the business that receives the funding is not successful. As a lender, your capital is at risk, and as a borrower you are in the precarious situation of having a large number of people invested in your business.
Alternative lending arrangements don’t always require approval by the Financial Services Authority. This can be an advantage if you are looking to invest your money quickly and with a minimal amount of administrative work, but as a borrower you can be left with less security than you would receive from a licensed, authorised lender.
I am interested in getting involved in alternative lending structures – what should I do?
Before becoming a lender or a borrower in any of the lending structures described above, it is wise to seek advice from an experienced financial solicitor.
The business and corporate lawyers at First4lawyers have experience in advising clients on all types of alternative lending agreements, and we can give you detailed guidance on the type of scheme that will work for you.
Whether you’re looking to grow your money quickly by investing through alternative lending structures, or seeking to benefit from a flexible source of business funding, contact us to discuss your requirements.