The week completed, 6th November 2015

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Alternative Finance

With interest rates remaining so low, and no sign of any imminent rise, those with funds are looking for a return greater than available via conventional sources. There are a lot of new businesses setting up as lenders to the SME sector and many are using funds from private investors to offer invoice finance facilities.

Whilst this brings extra choices to borrowers its not without risk, from all angles. Investors are enthused by the promise of returns in excess of 10% but there are more than a few issues to possibly dampen this enthusiasm. Investors putting funds into conventional savings vehicles are afforded a degree of protection, placing funds into invoice finance comes with absolute risk.

Invoice finance providers are well used to managing portfolios and risk that comes from financing an asset as fluid as an invoice. They tend to bear in mind the seemingly constant stream of attempts to defraud financiers from the raising  of completely spurious invoices to collusion between buyer & seller.

Whats concerning is the new single debtor financiers, using investors money, and cutting corners as far as risk management and evaluation is concerned. To the lenders, there will be inevitable losses and investors, far from achieving their 10% + returns may find their capital at risk.

Caveat Emptor and all that applies and investors, as long as they are aware of potential losses enter eyes wide open. My concern lies with genuine businesses, funded by a lender with a compromised book, then struggling to access finance from the financier with whom they have an agreement.

I have been approached by two new ones this week offering selected debtor or invoice finance and the numbers of funders is continually rising. With no sign of an interest rate rise this trend is set to continue. More than ever the independent adviser/broker has an important role to play.