Sibos 2015: Alternative financing models

With banks having reduced lending to some firms due to risk and capital constraints, a changing landscape has left a number of companies, and SMEs in particular, devoid of bank financing. That gap has, however, opened up opportunities for alternative financing.

As GLI Finance CEO Geoff Miller explained it at the Corporate Forum at Sibos, alternative financing companies are now offering solutions with a new approach. His firm uses new technology to get more information from SMEs, for example, and has changed the way risk is assessed so that they can offer and dynamically price loans based on the risk they actually represent.

Along with offering financing on their own, these alternative financing firms often collaborate with banks either directly or as white label service providers. Demica CEO Matt Wreford said banks have the lowest cost of capital and his firm’s business would not operate as well without bank partnerships. Miller concurred, and also noted that intermediated transactions are often preferable because the quality can be better than lending to companies that contact alternative financing providers directly.

Miller said the alternative financing companies can actually help banks to improve their relationship with SMES. If a bank doesn’t want to provide financing, for example, the introduction of a partner may open up solutions that bank clients wouldn’t otherwise have. As one example, Wreford said his firm worked with an Italian bank that brought them a transaction and then placed a tranche of funding, so the client received a loan rather than being rejected.

The alternative financing market may grow even more in the coming years due to government Intervention. In the UK, for example, the government will require banks to send rejected applications to alternative finance providers beginning in January 2016.

As banks look at working with alternative financing companies, Miller said, it is important for banks and borrowers alike to understand the types of alternative financing companies because not all firms operate the same way. Some firms are purely technology-driven, don’t understand underwriting and may believe they have the greatest algorithm to predict the future. These firms may run into difficulties. On the other hand, other business have grown up from the finance world and use their risk management experience as well as technology to scale the business.

Not all banks have pulled out of funding SMEs, of course, and some are working to enhance their capabilities even as they go it alone. Wells Fargo Innovation Group SVP Bipin Sahni said that his bank continues to be a large lender to SMEs and is now offering tools that add value. Along with giving SMEs information such as data they can use to plan business growth, Sahni said the bank has launched mentorship programs, regional advisory councils, and advisories to help SMEs understand how to borrow. “We’re looking at added value,” Sahni said. “If we can help a small business become a large business, there’s nothing better.”

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