Banks can benefit from a collaborative relationship with alternate lenders

Banks can benefit from a collaborative relationship with alternate lenders

While the macro economic data remains grim, many companies are eagerly looking to take advantage of acquisition and commercial property opportunities. Rather than simply declining deals, South African banks should consider collaborating with independent, alternate lenders

There is no doubt the current market is not conducive to easy lending or to companies looking to grow by acquisition. Macro economic data and tightening regulations have the major banks retreating further into their shell. Moreover, much of the growth funding currently comes from the pension funds which are just as aware of their risk profile – and with many of them focused on developmental targets, SME growth and the renewables space.

However, while the traditional lenders may be battening down the hatches, all is not lost for businesses looking to capitalise on a downturn economy.

South Africa is following the route of the US and UK, where the alternate lending market is growing by leaps and bounds.

The lightly regulated entrants such as specialist investment houses, asset managers, insurance funds, and peer-to-peer lending institutes offer fairly cheap and convenient finance.

According to data analysis firm, Preqin, investors worldwide have raised almost $80bn for direct lending funds in the past two years due to the rising demand from small businesses for alternative sources of finance.

In the US, about 25% of loans to small to medium companies come from alternate lenders positioning themselves as ‘business development companies’.

Locally, there are far more alternate lenders than many people are aware of. Currently there are well over 60 specialised finance providers which exclude banks and private equity firms. These include specialised equipment finance providers, general and specialist finance houses and bridging financiers.

Banks cutting themselves off to potential business

Traditional lenders, such as the big banks, are understandably circumspect about financing growth at the moment. Unless deals specifically fit their criteria, many banks will simply decline the deal. What’s more, some banks have not been particularly open to referring clients to alternate lenders. In some instances this has been because there has not been much financial benefit in doing so or, because if something goes wrong with a referred or co-financed deal, people may come back to the banks and lay the blame at their feet.

However, the benefits of banks working with independent lending companies far outweigh the risks.

Independent financiers understand the requirements of clients. They can spend more time with them, they can work with the client to prepare their financial modeling and ask the questions which owner managed businesses often don’t think of, or may not know.

Independents can advise on what ratios other financiers will look at and can translate this into the format required by potential funders. Most importantly, independent lenders have access to a diverse network of funders.

An independent financing company can help source the best deals and the best terms. They will give the client an idea of the options as well as how to combine a funding solution which includes short-term, long-term and structured debt.  An independent lending company will also be in a position to mix and match growth finance institutions and products since they have working relationships with the banks (both big and small), the credit funds, the asset managers as well as select private funders – and are not beholden to any of them.

Acquisitions are also often incredibly time sensitive and short-term liquidity is often key to closing the deal. Independent lenders can find solutions for time sensitive transaction when funding is not available from commercial banks, or when they are taking too long with the loan applications.

Choosing the right team

When a deal is declined by a commercial bank, many people turn to their accountants for assistance. Together with good legal advisors, these professionals form a valuable part of the collaborative deal broking team.

This can benefit the business owner as each company has its own unique requirements. This is influenced by the sector in which it operates as well as the company specifics. Accountants often have deep insight into companies, their operating requirements as well as their long-term growth strategies.

Moreover, many acquisitions include complex transactions as part of the deal. These include consolidation assessments and identifying and accounting for derivatives, complex financial instruments and new or modified stock compensation plans. Complex valuation techniques also further complicate a deal and it makes excellent sense for accountants to be part of the strategic team at the outset of the negotiation process.

Once the legal and accounting team have structured the deal most appropriate to the client, the logical next step is to turn to an independent lender to ensure the appropriate capital is raised.

While the traditional funding for acquisitions may be harder to come by, banks could take this opportunity to adopt a more collaborative stance. By working with the extended lending ecosystem and its associated professionals, banks will benefit from satisfied clients who will remain loyal and increase their transactional worth.