Although it is common for people in business to approach banks for finance, there are other options available that may be a better fit for your business. Non-bank lenders may have lower interest rates and charges, and be able to make loans over a longer period than a bank. They can also be less restrictive about high loan to value and issues like poor credit rating or experience of recent losses.
It is important you read all agreements carefully before you borrow from a non-bank lender and find out if any assets will be required as security.
If you are interested in obtaining finance from a non-bank lender, consider the following:
1. Commercial loan providers
Commercial loan providers - also known as non-banking financial institutions - are organisations that provide financial services like loans and credit facilities, but don't have a banker's licence. This means they cannot take deposits from the public or offer normal banking facilities such as overdrafts. However, they can have less restrictive lending criteria and may be a useful and competitive source of funding.
Commercial loan providers in Northern Ireland include:
2. Social and community lending
You may be able to borrow money from a credit union which is likely to be more affordable than a bank loan. There are also various lenders that offer loans to disadvantaged groups, community businesses and social enterprises. See social and community lenders.
3. Joint ventures and partnerships
One way to increase resources is to enter into a joint venture with another business. This can offer many advantages - such as increased capacity, access to new markets and the availability of greater technical expertise. See joint ventures and business partnerships.
4. Factoring and invoice discounting
It may be possible for you to raise funds against unpaid invoices. Invoice discounting, factoring or supplier finance can all be useful methods to improve your business' cashflow. See factoring and invoice discounting.
5. Equity finance
You could sell shares in your business if you want to raise long-term finance. This would mean you won't have to repay the debt or pay interest, but it will involve partly giving some ownership of your business and its future profits. There are various sources of equity finance, including venture capital, the stock market and business angles. See equity finance.
6. Crowdfunding
Crowdfunding is where a number of people each invest, lend or contribute small amounts of money to your business or idea. If you seek funds this way, you would typically set up a profile of your project on your website then use social media and various networks of business, family and friends to raise the money. See crowdfunding.
7. Family and friends
Family and friends can offer credit on a flexible, long-term and low-cost (or free) basis. You should make sure that the terms of any loan are clearly understood by both parties. See financing from friends and family.
8. Government financial support
If your small business is struggling to access bank finance, there is a government scheme in which the UK's biggest banks will pass on details of any businesses they have rejected to three alternative finance providers. These are:
- Funding Xchange
- Business Finance Compared
- Funding Options
If your business is new or expanding, you could be eligible for business development grants or other government support schemes. See grants and government support.
The Non-Bank Financial Institution Supervision Department has a statutory mandate to supervise and regulate the activities of non-bank financial institutions (NBFIs) so as to promote the safe, sound and efficient operations and development of the financial sector.
NBFIs are licensed and regulated in accordance with the provisions of the Banking and Finacail Services Act of 1994 (BFSA) and the Regulations and Prudential Guidelines issued thereunder. As key players in the financial sector, NBFIs are subject to regulatory requirements governing their prudential position, consumer protection and market conduct in order to safeguard the overall soundness and stability of the financial system.
Requirements for Setting up a Non-Bank Financial Institution
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The financial industry isn’t the easiest one to understand. There are many different factors and sectors to get to grips with, each with their own set of rules and criteria involved. This can make trying to get your head around a financial concept seem like a daunting task, but deepening your understanding of these elements could help you make the right decisions when it comes to your own finances, earnings and spending.
NBFIs are one such financial factor which often requires further insight in order to fully understand. Luckily, we’re here to help you with some of the details on non-bank financial institutions so you can truly assess which financial route you should be taking.
What is an NBFI?
A non-bank financial institution is a company that offers financial services, but does not hold banking licences and therefore cannot accept deposits. NBFIs are not supervised by a national or international banking regulatory agency. However, operations of non-bank financial institutions are often still covered under the country’s banking regulations.
An NBFI will facilitate bank-related financial services, without holding the status of a ‘bank’. These services often include risk pooling, contractual savings, market brokering and general investments. Examples of companies classified as NBFIs include:
- Insurance firms
- Cashier’s cheque issuers
- Pawn shops
- Payday lending companies
- Currency exchange companies
- Microloan organisations
- Cheque cashing locations
NBFIs are generally praised within the financial sector for offering a greater range of choice to people with financial opportunities and concerns. For example, esteemed US economist Alan Greenspan spoke about how the role of NBFIs has worked to strengthen the economy, as they provide “multiple alternatives to transform an economy’s savings into capital investment which act as backup facilities should the primary form of intermediation fail.”
The role of Non-Bank Financial Institutions in the wider industry
For most people, the bank is the first port of call when seeking out financial aid or advice. However, many people also find that the services offered by the bank don’t adequately meet their requirements, leaving them at a loss for what to do next.
While banks tend to offer a set of financial services as part of a clear packaged deal, NBFIs unbundle these offers and tailor their services to meet the needs of the specific client. Therefore, many people who can’t find help at the bank can find it with an NBFI.
The role of NBFIs is generally to allocate surplus resources to individuals and companies with financial deficits, allowing them to supplement banks. By unbundling financial services, targeting them and specialising in the needs of the individual, NBFIs work to enhance competition in the financial sector.
NBFIs offer most kinds of banking services, often including:
- Loans
- Credit facilities
- Retirement planning
- Education funding
- Underwriting stocks and shares
- Money market trading
- TFCs (Term Finance Certificates)
- Wealth management
- Portfolio of stocks and shares management
- Discounting services
NBFIs, explained
The number of non-bank financial institutions has increased greatly in recent years, as retail companies, industrial companies and venture capital companies have entered the lending business. NBFIs frequently specialise in the support of property investments, preparing feasibility, market or industry studies for companies.
The kinds of services offered by non-bank financial institutions generally fall in one of three categories, which we have outlined in further detail below.
Risk Pooling Institutions
These are organizations such as insurance companies which underwrite economic risks associated with a series of factors, including illness, death, damage and risk of loss. In return for collecting an insurance premium, these organisations provide a promise of economic protection in case of loss.
There are two key kinds of insurance companies: general insurance and life insurance. The former tends to be a short term agreement, while life insurance can be agreed on a much longer term basis.
Institutional Investors
This category refers to organizations such as pension funds and mutual funds. These are the institutions which trade securities in volumes that qualify for lower commissions.
These are also known as contractual savings institutions. Mutual funds can be either open ended or closed ended.
Other Non-Bank Financial Institutions
These are other forms of NBFI which provide financial services such as the leasing of assets, company management, financial advice, security brokering and market makers, who provided liquidity.
It may also refer to specialized sectorial financiers who provide a limited range of services to a targeted sector, such as real estate financers or payday lending companies.