Non-banking financing: what are the non-banking credit solutions?

What is a non-bank credit?

Personal credit is a form of lending without the intervention of banking institutions that is concluded between two individuals. Also called PAP or P2P, this credit is generally easier to obtain than a bank credit. 

Moreover, this type of loan benefits from reduced fees for the constitution of the file, with interest rates often lower.

Non-bank financing was democratized after 2008 in response to the subprime crisis. Indeed, the financial crisis raised the veil on poorly controlled risk management by banks and led to the implementation of a stricter macro-prudential policy, notably through theBasel III initiative. The increase in banks' capital reserves and the various initiatives put in place have had the indirect consequence of reducing access to credit for start-ups and other innovative SMEs, particularly in France where the weight of bank outstandings in the financing of small businesses is particularly high.

Moreover, non-banking differs from the historical banking system in that it does notleverage the capital it finances. Unlike banks, non-banking actors do not have the capacity to create scriptural money. More generally, non-banking companies do not have abanking license and therefore cannot receive deposits from savers. 

Who are the main non-bank players?

The meeting of a largely unsatisfied demand for financing in a highly interdependent market with the power of the Internet and the efficiency of new technologies has led to the emergence of numerous fintechs offering non-banking services. 

Participatory financing

Participatory financing, also called crowdfunding, is an exchange of funds between individuals outside of institutional financial channels. This call for funds is generally made via online platforms promoting projects. The financing can then take 4 forms:

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• A gift, with no return required
• A gift waiting for a reward 
• A loan with or without interest
• An equity investment
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Participatory financing is therefore based on collective solidarity and can be considered as one of the technological and innovative answers to the inability of banks to finance new businesses, or even those that do not yet exist, by bringing together people with financing capacities (donations, loans, equity contributions) around a project requiring initial investments.

Marketplaces

Some platforms take the form of " marketplaces " and connect a financing need with a financier covering the entirety of the beneficiary's need. The needs are usually for small amounts, due to the high risk exposure, and for short maturities. This is why this model is particularly well suited to the financing of trade receivables, as shown by the examples of Marketinvoice in the United Kingdom and Receivables Exchange in the United States.

Revenue Based Financing

The Revenue Based Financing is a new financing scheme based on the company's future revenues. It allows digital companies with full revenues to finance their growth in a non-dilutive way and very quickly. 

It is a way for companies to raise capital by promising a percentage of future revenues in exchange for the money invested. It is a good alternative to fundraising.

In Revenue Based Financing, the investor has no direct ownership in the company and does not require fixed payments. The amounts given to the investor are proportional to the performance of the company. 

In concrete terms, if your sales drop during a certain month, your royalties will be reduced. Conversely, if your sales increase the following month, the amount to be donated will increase in the same way.

This alternative to fundraising also has the advantage of being accessible to multiple types of companies. It does not require profitability criteria, exponential growth forecasts or the marketing of ultra innovative products. 

With Karmen, French start-ups, SaaS and e-commerce companies benefit from a 100% non-dilutive, digitalized and fast financing solution. Your eligibility for funding is determined in less than 48 hours. If you are eligible, the funds are released very quickly. For more information, contact us! 

Why use non-bank financing?

Non-bank financing offers many advantages, benefiting both lender and borrower. Indeed, borrowers can dispense with the conditions imposed by banks to obtain conventional credit.Access to financing is thus democratized, and people with limited incomes and companies unable to meet bank conditions and guarantees can obtain financing.

Lower constraints

First of all, non-banking reduces the constraints on access to financing by overcoming the constraints on granting bank loans. Nevertheless, the steps to obtain a loan can be quite long and require numerous guarantees. For example, the partners must make a sufficient equity contribution. This contribution must often represent at least 20% of the global financing. 

As noted earlier, as a result of the financial crisis, banks have increased the covenants and guarantees required from companies to obtain credit. Although the financial cost of a loan has decreased, the number of companies that can benefit from it has decreased. Non-banking removes these barriers to entry through a risk-adjusted price, which is often higher but suitable for early-stage projects due to higher expected profitability.

Finally, another advantage of the non-bank credit concerns the low cost of the file fees and the ease to set up a financing file. Moreover, it is not concerned by heavy administrative constraints. 

More diverse financing solutions

In addition, the solutions offered by non-bank financing cover a wider range of needs. The classic credit always implies the repayment of interest in addition to the sum borrowed. The latter can then be repaid in several instalments along the duration of the loan(amortizing loan) or in one instalment at the end of the term( bullet loan). For their part, non-banking financing solutions are diverse and innovative. 

From the bottom of the balance sheet to the top, companies find a specific solution in each situation because of the diversity of existing financing platforms . The challenge remains to know to what extent this diversity will make it possible to cover all the needs of companies, whether it be the nature of the funds, the purpose of the financing or the size. Thus, if it is possible to take out a loan with a non-banking player, it is also possible to finance oneself through future revenues with the RBF.

Better transparency

Non-banking financing systems also improve transparency between lenders and borrowers. A necessary condition for non-banking to function properly, transparency increases investor confidence in the platforms and in the risk control of the loans. The virtual proximity between investors and borrowers enabled by the Internet makes it easier for companies to access liquidity , as funders know more precisely what level of risk they are investing in.

The efficiency and better transparency of non-banking players has even been promoted by the public authorities and the introduction ofOpen Banking. This trend was born in Europe following the adoption of the European Payment Services Directive (PSD2) in 2015. Concretely,Open Banking refers to an "open" banking system, in which users, whether individuals or companies, can authorize financial actors to have access to data on their assets and financial transactions.

Thus, non-bank financing has been democratized following the subprime crisis and responds to a growing need for financing for small businesses and projects that are poorly or not financed by traditional banks. While banks make loans difficult and require many conditions and guarantees, non-bank credit is emerging as an innovative and transparent financing alternative. There is a solution for non-dilutive and fast financing of digital business investments: Revenue Based Financing is the solution for your company!