SMEs warned to take care when choosing lenders

The National Association of Commercial Finance Brokers (NACFB) is advising SMEs to read the fine print when seeking finance after its number of rejected lenders skyrocketed in the last two years.

A growing number of so-called ‘bandwagon’ lenders and ‘flatpack’ finance providers have entered the commercial finance market and are posing a significant threat to SMEs who are seeking investment for growth, according to the NACFB.

During the last two years the Association has rejected around 40 lenders applying for membership of their prestigious organisation – eight times as many as were rejected in the previous two years.

According to a study conducted by NACFB, nearly two thirds of the rejected lenders reportedly lacked experience of the principles, specifically those related to management and underwriting, while 30 per cent issued excessively high interest rates to SMEs, and ten per cent just fell short in the quality of the product they offered to customers.

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

“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.

“It’s 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 has said that it is vital that SMEs conduct proper due diligence on all business lenders and finance providers before they even attempt to make contact. They are also encouraging businesses to seek the advice of an independent broker or agent that is experienced in arranging business finance and conducting detailed due diligence.

Link: NACFB Newsletter