5 Key Business Financing Trends and Predictions for 2016
Financing options have been expanding steadily for smaller businesses over the past decade. Will this trend continue? Find out what lies ahead for business borrowers this year.
The financing market for small and medium-sized businesses (SMBs) has undergone major transitions over the past decade, as banks retrenched from the space and alternative lenders stepped in to fill the void. But 2016 may see new trends emerging. Here are five key developments we think are worth tracking this year.
1. Continued Use of Unitranche
In the competitive, high-multiple deal environment expected this year, closing transactions quickly will be important. Given this, unitranche loans are likely to remain popular in 2016. These structures, which combine senior and subordinated debt into one instrument, often carry blended amortization that comes out to less than that of a first-lien and second-lien combination. Many unitranche financings are based on a floating Libor rate, but they will likely remain popular even when interest rates rise.
2. Regulatory Changes and Complexity
Since the financial crisis, regulatory pressures have prompted banks to divest themselves of “risky” or capital intensive businesses or departments. As a result, banks have withdrawn from lending to certain constituents, such as SMBs. Traditional lenders are focusing ever more on regulatory capital requirements. This is expected to result in reduced leverage for commercial finance companies and other entrepreneurial lenders, leading to a pull back in some forms of alternative finance.
3. Disruption by FinTech Firms
Amidst the regulatory pressure, non-banking financial institutions, especially FinTech firms, will increasingly impact the future landscape of banking. The origination volume of online lenders has been rising dramatically, by about 175% each year, in comparison to a steady decline of about 3% among traditional banks. Many traditional banks remain behind the curve. This trend forms part of what Jeffrey Sweeney, Chairman and CEO at US Capital Partners Inc., describes as the ongoing “democratization of capital.” However, increased regulation and compliance are becoming a reality as the sector matures and scales up.
4. Banks and Alternative Lenders Working in Partnership
Rather than operating as competitors, traditional banks and alternative lenders will increasingly begin collaborating. For example, JPMorgan Chase, the largest US bank, has recently partnered with alternative lender On Deck Capital Inc. to speed up the loan process for millions of small-business clients. Likewise, Citibank has partnered with online marketplace lender Lending Club, while ING is partnering with Kabbage. In 2016, we are likely to see a marriage between FinTech firms and banks, as banks try to close their innovation gap and overcome legacy systems.
5. Strong Interest in Refinancing
Business credit and cash flow has been improving steadily for smaller businesses since the financial crisis. Many of these businesses, however, remain locked in constraining or costly financing structures, hampering their ability to grow. As the economy continues to grow and new commercial opportunities arise, we believe the improved financial footing of these SMBs will lead to an increasing number of them seeking to refinance existing debt.