As private equity firms have scaled back investments due to increased interest rates, many established SMEs and merchants are seeking innovative ways to source growth capital. Traditional banks, once the cornerstone of business finance, are no longer the only game in town.
In the last decade, private credit and alternative investments have boomed. The shift towards non-bank financial institutions (NBFIs) and new-age alternative lenders is becoming mainstream, with companies like Babylon playing an instrumental role in shaping the future of private credit.
The Rise of NBFIs and Alternative Lenders
Faced with the challenges of securing funds to grow through traditional channels, many businesses are turning to NBFIs and alternative lenders. And NFBIs (including fintech originators) are turning to Babylon for capital. These entities are not subject to the same stringent regulations as banks, and are often more willing to lend to businesses that banks say “no” to.
Understanding the Appeal of Growth Capital
Alternative lenders offer a level of flexibility and responsiveness that traditional banks often cannot match. Especially with the timing of getting a deal done. With a more streamlined application process, quicker decision-making, and a higher risk tolerance, these lenders are often able to meet the capital needs of businesses more effectively.
Types of Growth capital
There are three main types of growth financing available for an established business: debt, equity, or a blend of the two. Debt would include a straight up term loan or asset-based financing (i.e. receivables loan), or a royalty financing deal where lenders take a % of sales in exchange for a lump sum up front. Equity is just that, equity in the profits and loss of the business on a permanent basis. The last type would be a blend, where lenders get some type of equity upside component, despite how capped it is from a reward perspective. Babylon is a pivotal player in debt growth capital, funding through a network of strategically aligned NBFIs.
Babylon: A Key Player in the Growth Capital Ecosystem
In this shifting financial ecosystem, Babylon has emerged as a vital player. Acting as a syndication partner or participator on the loan, Babylon funds loans alongside lenders, helping to facilitate the flow of growth capital to businesses.
How Babylon is Making a Difference
By partnering with lenders, Babylon is bridging the gap between businesses seeking growth capital and the funds available for lending. Through this collaborative approach, Babylon enables businesses to access the capital they need to grow, while also sharing the risk with the originating lenders.
Babylon shares risk with these channel partners in order to avoid moral hazard.
The Impact on Businesses and the Economy
This shift towards alternative lending channels is having a significant impact on businesses and the broader economy.
Fuelling Business Growth
Access to growth capital allows businesses to invest in new technologies, expand their operations, hire more staff, and enter new markets. This, in turn, can lead to increased revenue, profitability, and business longevity.
Stimulating Economic Productivity
On a broader scale, the availability of growth capital through alternative channels can stimulate economic growth. By supporting business expansion, job creation, and innovation, this lending model contributes to a more robust and dynamic economy.
Risks and Considerations of Growth Capital Investments
While the benefits are clear, it’s important to understand the potential risks and considerations involved when seeking growth capital through alternative lenders.
Higher Costs
While alternative lenders may have a higher risk tolerance, this can come with higher interest rates or fees. Businesses need to carefully consider the total cost of borrowing before committing to a loan.
Market Stability
As with any financial market, the alternative lending sector can be subject to fluctuations. These changes can affect the availability and cost of capital, potentially impacting businesses’ ability to access growth capital when they need it.
The Future of Growth Capital
The shift towards NBFIs and alternative lenders is transforming the landscape of business financing. With Babylon fueling growth through channel partners, this shift promises to unlock new opportunities for businesses to thrive and economies to grow. As we look to the future, the ability to adapt and innovate will be critical in harnessing the full potential of this new era of growth capital.