A guide to finance for non-bank specialist lenders
Securing capital from a speciality finance provider can accelerate the growth of a non-bank lender’s platform. Warren Mutch, Head of Speciality Finance at Shawbrook Bank, explains why working with a flexible, long-term partner with a broad offering is the best way for non-bank lenders to take full advantage of the benefits speciality finance can deliver.
Speciality finance can be a valuable tool for non-bank lenders that want to expand their franchises.
Partnering with the right speciality finance lender – that can provide flexible, long-term capital and has a broad offering to support non-bank lending businesses as they grow and diversify – is key to unlocking the full potential of wholesale funding.
Broad coverage
Non-bank lending is comprised of a broad church of participants, including peer-to-peer lender, fintechs and private credit funds, who target end markets ranging from buy-now-pay-later (BNPL) to development finance.
An effective speciality lender will understand the priorities of different types of non-bank lenders and the end-markets they service.
Shawbrook, for example, has a proven track record of serving specific audiences with highly targeted lending solutions. Examples of end-markets Shawbrook covers include:
1. Consumer
Consumer lenders provide funding to individuals, and include point-of-sale lenders, personal loan providers and motor finance, as well as other more niche end markets.
2. SME
SME-focused non-bank lenders support small and medium-sized business clients, and provide finance against equipment and vehicles, leasing finance, short-term working capital finance and secured SME loans.
3. Property
Property-backed lending will include development finance, specialist mortgage lending, bridging loan finance.
Flexible structures
The speciality finance partner will not only be attuned to the distinctive end-markets targeted by non-bank lenders, but also be able to provide flexible, tailored credit structures that dovetail with a non-bank lender’s specific requirements.
Shawbrook, for example, can underwrite block discounting and revolving credit facilities. These are facilities where the capital advanced is secured by the loans on the non-bank lender’s balance sheet.
Platform lending facilities – where non-bank lenders sell on loans directly to the speciality finance provider, which will then hold these loans on its balance sheet – are also provided, including variations where the non-bank lender will continue to service the loan.
Flexible structures and broad end market coverage allow speciality lenders to grow with their customers and support client expansion in adjacent to the non-bank lending market.
Long-term partnerships for long-term growth
Pricing and terms are always going to be priorities for borrowers, irrespective of the markets they operate in, but in speciality finance an equally important cornerstone of success is investment in long-term relationships.
Non-bank lenders who see value in operating with a partner that has had a significant track record in the speciality finance market for many years are more likely to enjoy better, long-term results.
Many non-bank lenders will be in the earlier stage of their journeys and still finding their way in their markets. They may have started out wanting to lend to property investors in a certain part of the country, but have found the market too competitive, or it has been difficult to build broker relationships.
If they want to move into another area or pivot into a different product, do they see the value of a partner who can grow and be flexible, and help them on that journey?
It is important for a non-bank lender to secure the right product at the right time. A non-bank lender with a £10 million loan book trying to set up a £100 million facility with a large commercial bank may incur substantial upfront fees and major legal costs from the City law firms that large bank will want to instruct.
When you take that pound cost and divide it by the relatively low interest income that is earned from what is still quite a small loan book, the single unit economics don’t always add up until significant scale is achieved.
As such, a big facility may look impressive, but it comes with large sunk costs. In most cases it is better to choose a facility that aligns with the size of the book, and then grow the facility as the book grows. This is where working with a specialist bank taking a partnership approach can be invaluable.
Looking ahead
Finally, a word on the macro-economic backdrop during the last 12 months. Rising interest rates have been very challenging for all lenders – bank and non-bank – and we have spent significant time working with our customers to ensure that their business models are sustainable in a higher rate environment.
It has been encouraging to see the resilience of our portfolio, and the excellent affordability analyses non-bank lenders have done on the ability of their customers to withstand higher rates.
Our clients have come through a challenging period and, as a funder into the speciality finance sector, that leaves us feeling more positive and more bullish about the months and years ahead.
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