Beware ‘bandwagon lenders’ that lack knowledge or skills » SMEInsider

Beware ‘bandwagon lenders’ that lack knowledge or skills

Small business owners have been warned about so-called ‘bandwagon lenders’ that don’t have the necessary skills or knowledge of the lending markets. Some are also charging exorbitant interest rates.

‘Flatpack finance’ is a growing problem, according to the National Association of Commercial Finance Brokers (NACFB), which reports it has turned down 40 lenders for membership over the last two years, an eightfold increase on the five or so lenders it rejected in the previous two years.

“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,” said Adam Tyler, chief executive of the NACFB.

Last week the Competition and Markets Authority’s report outlined how to make the market more transparent for smaller business customers.

The main objections the NACFB has cited when turning down these new entrants to the lending market centre on several key issues:

  • 60% was due to a lack of experience of the principals, specifically management- and underwriting-related
  • 30% related to the excessively high interest rates being offered to SMEs
  • 10% resulted from the low quality product offering and lack of knowledge of the broker market supporting SMEs

“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,” said Tyler.

According to NACFB, 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,” Tyler said, “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.”

Any small business owners concerned about the strength, expertise or conduct of their lenders should do a thorough due diligence check on the company, and they contact the NACFB for further information.