CCR2 Compliance


Credit assessment and the alternative-finance market


Although the figures will always play a major role, other skills are still important for a credit risk analyst


Mike Burrage Head of credit, TradeRiver


You have probably heard a lot of noise about ‘alternative finance’ and tried to make sense of the options available. You might have even read stories about the sector and wondered about perceived levels of risk and transparency around finances. It has probably left you wondering: is the


credit assessment in the alternative-finance market conducted differently to that of the traditional banks? From the perspective of a credit analyst,


I would say no. We are a direct lender of unsecured working capital, so, as it is unsecured, we have to be sure about who we are lending to.


A traditional approach We find that there is no substitute for a traditional root-and-branch credit review of the business. Much like a credit analyst in traditional banking, this starts with a detailed understanding of the borrower’s financial information. Core documents remain the audited or filed accounts, but must include management accounts and forecasts. The latter items must be robustly challenged so judgements on accuracy and deliverability can be made. There is no substitute for a visit to a firm’s


premises and a face-to-face meeting with the key directors or managers, which we ensure includes the CEO and FD. We make a point of visiting prospective clients, whilst there we like to take advantage of the opportunity to ‘walk’ the business, which we find can be almost as revealing as the numbers. Simple things stand out. For instance, if


the business has a warehouse, how orderly and spacious is their racking system? Our experience has shown that, if one part of


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the business is inefficient then it is likely that other parts might be too. Any review we conduct also maps out the


business’s operating and cashflow cycle from cradle to grave. This allows us to match facilities to cashflow needs and identify where repayment is going to come from. The more complex the business and financial arrangements, then the greater the depth of due diligence we employ. Just like a bank, our aim is to ensure that


we only lend to customers where we have a detailed understanding of their business model and strategy. As we lend on an unsecured basis, it is vital for us to have as clear a picture as possible – and the more we know, the more we can help a business.


The benefits We find that directors want to be left to run their business, without spending lots of time meeting bank covenant tests and conditions of sanction. Businesses are attracted to the flexibility


that providers like us can offer. We give our customers up to 120 days to


pay back any part of their credit facility. They are also in control of what they spend it on and when. Plus, all transactions are managed online which reduces the amount of paperwork needed. The availability of credit plays a major


There is no substitute for a visit to a firm’s premises and a face-to-face meeting with the key directors or managers


part in attracting firms to the alternative- finance market. Companies approach alternative-finance providers because they have either been unable to secure adequate funding from a bank, do not wish to commit to onerous terms, or need access to flexible finance quickly and cannot afford to wait months for a response. Many are seeking a different kind of relationship with their lender too. Companies are looking for responsiveness,


flexibility, and support. They are keen to work with lenders who take time to understand what makes their business tick and what borrowing from us will enable them to do, such as earning a discount from suppliers by settling early. From the outset, we seek and encourage


transparency, so that we can help the company grow their business. We try to be supportive, without the


burden of conditions. Even as credit analysts, we strive to be responsive and flexible and look for new ways to help a client; not just at the outset but throughout the relationship. CCR2


June 2017


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