Welcome to the world outside traditional banking methods
This is the data dimension of alternative lending. Let's put some context around the rise of alternative lendings like BNPL or RBF that Silvr offers: business borrowers are underserved by banks and are looking for lenders seeking attractive returns.
BNPL, RBF: do these acronyms that are everywhere now just confuse you more than anything else? They are, however, part of what is known as alternative lending. This term refers to all financing granted outside the traditional banking system.
Emerging in tandem with the Internet in the mid-2000s, these new types of loans operate through online platforms that use technology to match borrower groups that are traditionally poorly treated by banks with lenders looking for attractive returns.
To understand the value of this type of lending, we went to interview SLAM, an asset manager specializing in digital alternative lending. Since 2014, the company has been providing European institutional investors and wealth managers with access to this new asset class, both in Europe and the United States. In what context did alternative lending to companies emerge, and how is Revenue-Based Financing in line with alternative lending?
It's a fact: there is a gap in the financing of companies by banks. According toassetmanager SLAM, 20% of bank branches have closed in Europe since the 2008 financial crisis - a trend that is continuing to grow. Below EUR 500,000, corporate lending is difficult for banks to make a profit, due to regulation and regulatory formalism on the one hand and high fixed costs and low margins on the other. For SLAM, SME lending is thus akin to an "unbanked" space: faced with banking regulations (Basel III), the cost of capital or the difficulty of banks to refinance loans with Central Banks, traditional banks prefer to abandon this type of financing.
The result is a financing provision problem for businesses. According to the French Banking Federation, only 31% of the 3.5 million French micro-enterprises and SMEs received bank loans in 2020. Of those that did receive credit, only 79% were able to obtain all the financing they had requested. The same is true at European level: of the 35% of European micro-enterprises and SMEs that applied for a bank loan, only 80% of them obtained the full amount of the loan. (Source: Survey on the Access to Finance of Enterprises, European Central Bank, 2020)
Faced with this lack of financing, which leaves one fifth of small and medium-sized companies without a satisfactory financing system, new players have begun to emerge, initially in the United States. They offer new financing solutions, more flexible and better adapted to the needs of small businesses in particular. What all these solutions have in common is that they use online platforms, through which borrowers submit their applications. They are asked to provide a certain amount of information, which is retrieved via API connections, as illustrated in the following diagram.
It is estimated that the first alternative lending platform models emerged in 2005 in the UK and 2006 in the US, in the form of digital peer-to-peer lending (Source: Morgan Stanley). With the financial crisis of 2008, these new types of loans spread rapidly, especially among consumers, as well as microbusinesses and SMEs, which had been abandoned by traditional banks.
The model has gradually shifted from peer-to-peer lending to lending backed by institutional investors such as hedge funds. In 2014, the first US alternative lending platforms went public. By 2021, Morgan Stanley Research estimated the amount of loans backed by institutional investors to be $15.3 billion across the entire alternative lending sector.
Perhaps the most iconic example of the breakthrough of B2B alternative lending platforms is Biz2Credit in the United States. Launched in 2007 by two brothers, the company originally just connected borrowers with funding sources. Since 2013, Biz2Credit has been offering its own financing deals directly to its customers. Currently, it claims to have supported 225,000 small and medium-sized businesses since its inception, with a total loan amount equivalent to $7 billion. Biz2Credit has paved the way for a multitude of other players and business models, both in the United States and in Europe. Falling into this bracket are Clearco and Ramp, to name just two.
Alternative lending solutions for companies include factoring, research tax credit financing and Revenue-Based Financing (RBF). Based on the company's future revenues, this rapid financing method is granted thanks to an analysis of the company's data. It is particularly aimed at digital companies with recurring revenues.
One of the key features of RBF is the fact that it can raise funds quickly (in 24 to 48 hours with Silvr) - a major advantage for entrepreneurs looking to obtain financing to fuel their growth. Revenue-Based Financing is also very popular with some asset managers, notably for its low volatility and short timeframe. Indeed, the duration of a loan is generally short - 6 to 12 months in principle.
As Erich Bonnet, co-founder and partner at SLAM, explains, in the context of credit market stress, where it is difficult to assess risk, it is easier to assess short-maturity risk than long-maturity risk. By lending capital to a player like Silvr, SLAM enables institutional players to deploy capital to SMEs that they would not otherwise have access to.
For all these reasons, Revenue-Based Financing, the latest offshoot of alternative lending, is all the rage in Europe. It offers the possibility of rapid access to a scalable source of financing, based on a company's growth data. Because of its speed of allocation and its consideration of the financial health of companies, RBF is emerging as a crucial financing option for entrepreneurs. This is especially true during the current economic downturn and high-inflation environment.
Published on
May 25, 2023
By
Manon
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