The Blog

Musings on corporate finance, fund raising, debt capital and other matters

Direct Lending: the new force in corporate finance

The post-crisis bank retrenchment strangled the supply of traditional sources of finance for Europe’s corporate base. In its place, a range of alternative finance providers have flourished. For loans of less than £1mn, new peer-to-peer (P2P) and asset-backed lenders now provide a cheap source of company debt. For loans greater than £200mn, corporate behemoths have turned to public markets exploiting the suppressed interest rate environment to borrow at record lows.

In the middle, the new, so called “direct lending”, market has arisen. Applying techniques and processes pioneered in large public markets, these institutionally backed lenders invest committed pools of capital directly into UK mid-market and SME firms.

The main problem that the direct lending market faces is not a lack of capital investment but the lack of commercial awareness by SMEs. A recent Grant Thornton survey highlighted that 73% of lenders see the lack of awareness and understanding about non-bank lending, even among the larger SMEs, as the main obstacle for the growth of this market.

Even where a corporate is aware of the alternative financing options available, accessing this market can be a daunting prospect. Without, the brand familiarity of a high-street branch network, establishing trust with a new type of borrower can take time. Further, direct lenders tend to have a tighter focus to their investment mandate, meaning that locating the right funder for your business can be a difficult process.
For those that can successfully navigate the market, the opportunity is clear. Direct lenders can provide capital solutions within a time frame that banks are unable to offer. Moreover, the sophistication of their operations allow them to tailor their lending to fit with the cashflow profile, risk appetite and equity dilution that works best for the business.

As the banks shake off their credit hangover and dip their toe back into the corporate market, they will find the world is a very different place to the one they left.