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Institutional, alternative and bespoke: no, we’re not a bank

18th Mar 2020   ·   The ThinCats Team   ·   Insights

All of our loans are sourced entirely from institutional capital. Which begs the question: are we now not just like a bank, minus the high-street branch network?

The answer is an emphatic “no” for a number of reasons:

Appetite

Unlike the banks, whose hands are tied by rules to protect their depositors, we actually want to lend to SMEs. We specialise in the ‘M’ of the SME sector. So, the more we can lend to quality businesses of this size, the more capital flows to those that need it (our borrowers) from those that have hundreds of millions of pounds to deploy (our institutional funders).

Since the financial crisis, banks have been forced by regulations to cut the risk exposure of their loan book by deleveraging, and SMEs have been on the receiving end of this. SME loans are viewed as high risk, and even more so if the loan isn’t property-backed. By and large, if a business loan isn’t backed by bricks and mortar, banks run shy of it.

In contrast, our panel of institutional funders have provided up to £700m to just the sort of businesses the banks shun. And we don’t have the same bias to property-backed deals, not only because we are not encumbered by the same regulatory restrictions as the banks, but also because we understand that in the modern economy, the real assets of a company are more often than not its people, intellectual property, contracts and customer relationships.

Our appetite to lend is not simply a function of being able to access different pools of capital compared to the banks. We also assess the businesses we lend to in a different way.

First, we have built a proprietary credit model called PRISM specifically to assess around 250,000 mid-sized SMEs in the UK. Having analysed more than 750,000 SMEs that have traded since 2007, our data shows that mid-sized SMEs are much less risky than the banks’ generalist credit models may suggest, particularly those businesses that are growing.

Secondly, we use our regional network of business development and credit specialists to meet potential borrowers as soon as possible in the funding process to help inform our potential appetite. It is only by meeting borrowers in person that you can fully understand their business plans and our capacity to support them.

Compare this with the banks who have closed hundreds of branches around the country in their move to a more centralised decision-making model.

Finally, unlike the banks, we don’t chop and change our lending appetite based on the sector in which a potential borrower operates. The confidence in our data and regional expertise lets us to take a bottom-up approach by assessing each business on its own merits rather than automatically ruling certain sectors “in” or “out”.

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Flexibility

Once we have decided to provide funding, we can be much more flexible in creating a solution that is truly bespoke to the borrower. A loan can be tailored to the specifics of the borrower’s business, rather than the banks’ need for regular repayments, irrespective of how a company makes its money. For example, we can offer interest-only payment periods and committed facilities options to match expected borrower cashflows

In broader terms our appetite to lend also differs to the banks on a more fundamental, philosophical level. We view the loans we make more as an investment partner looking to provide long-term support, whereas the banks view lending more as a transactional relationship where they can enhance margin by offering ancillary services.

Service

As mentioned earlier, the days when a business owner could book an appointment with their local bank manager or business adviser are fading into history. By contrast we offer a “personal, local and flexible” service model. This applies not just when assessing our initial credit appetite, but through the whole funding process and after the funding has drawn down.

Unlike the banks, our team of regional heads of credit are empowered to decide on our commitment to fund. By being local and accessible we can get all the answers we need, by working closely with the borrower and their adviser. This avoids a whole layer of bureaucracy leading to a quicker lending decision and a more bespoke funding solution. And as a loan progresses through the funding process, the local business development team will keep you informed along the way.

In the banking model a proposal backed by the bank’s business development officer gets passed up the line to its investment committee, which then shuffles it around, sends it back for further clarification, before rejecting it weeks, if not months, down the line.

Certainty

A vital benefit for business borrowers and advisers of our move to an institutional-only funding model is the additional certainty that this provides. That £700m pool of institutional capital mentioned earlier means we have real confidence when we offer a loan. What’s more, the due diligence that our institutional funders – from pension schemes to global asset managers – carry out on our business and processes provides extra confidence: the access to institutional capital has been instrumental in transforming the alternative lending sector in the UK from being a cottage industry a decade ago to a proven source of valuable SME funding.

We are now able to bring this level of expertise to businesses too small for the direct lending funds, which normally lend from £20m upwards. We’re able to do this by combining our SME data insights with our regional network of business finance experts.

This certainty of capital, combined with our “personal, local and flexible” service model means we can deliver the key things that borrowers and their advisers need: speed, certainty, flexibility.

As a result, we’re seeing rising recognition of the value we bring, as borrowers and their advisers increasingly see us as the first choice for loan capital. Last year, we provided a record amount of funding taking our total lending to more than 600m

We provide modern funding for a modern economy, drawing on some very traditional and valuable skills. That, we think, distinguishes us not only from the banks, but pretty much everyone else.

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