Small and medium-sized UK companies have been warned about the growing number of bandwagon lenders and ‘flatpack’ finance providers that are flooding the market.
Over the past two years, the National Association of Commercial Finance Brokers (NACFB) says it has turned down 40 lenders for membership, an eightfold increase on the five or so lenders it rejected in the previous two years.
Of the 40 lender applications the NACFB has rejected in the past two years, 60 per cent were due to a lack of experience of the principals, specifically related to management and underwriting.
Just under a third (30 per cent) relate to the excessively high interest rates being offered to small and medium-sized enterprises (SMEs), and 10 per cent to the low-quality product offering and lack of knowledge of the broker market supporting SMEs.
Adam Tyler, chief executive of the NACFB says, ‘The success of many alternative finance providers and peer-to-peer lenders, coupled with the continued low interest rate environment, has resulted in a gold rush mentality.
‘We have a situation where a growing number of opportunistic lenders with little if any experience are jumping on the bandwagon and combining forces with investors who are desperate for higher returns.’
Tyler adds that it is relatively quick and easy for these ‘flatpack’ finance providers to set up but the principals typically have a poor industry knowledge, flimsy management processes and a payday loan-type mentality of charging excessive interest rates.
‘In other words, they may look the part but in reality are very unstable. To make matters worse, the eagerness of the underlying investors to get their money out into the market working for them means underwriting is often of poor quality, too, which puts them at greater risk of defaults.
‘This also puts viable borrowers at risk of having their own loans called in prematurely.’
The NACFB is urging SMEs to do their due diligence on all business lenders and finance providers before they approach them and, if necessary, to seek the advice of an independent broker experienced in arranging business finance.
Further reading on lending