When a business needs funding, the question often stands; do I go to a bank or a finance house? The answer; it all depends on the nature of the client’s request. Let me explain, through the medium of cake.

Banks have spent years building the ‘perfect the sponge cake’; a delicious yet simple cake, that appeals to most pallets. The financial equivalent of this sponge cake is something that your average business might seek from a bank. This could be an overdraft, a loan, a credit card or a current account. In fact, you name it, and from the generic financial products available out there, banks have certainly got it. Each bank will package it differently; a bit of icing here and there, a ribbon or two, even different flavours. They’ll offer chocolate cake, orange cake, lemon cake and even carrot cake, but no matter which way you look at it it’s still sponge cake, and that isn’t everybody’s cup of tea.

So what happens when you need a cake baked in Spain containing only organic ingredients from the Himalayas with your name on it? The non-culinary equivalent of this is where finance companies have a role to play. Finance companies are the people to call when a business needs money for something unique, specialist or when the client needs more than the bank is willing to lend. Finance companies develop specialist products, have a broader range of acceptance criteria and have the time to dedicate to reviewing each loan application in greater detail, taking into account factors such as management capability, future plans and business potential.

Customer demand is what drives any business, from cakes to credit. Although banks do have the capability to cater to all customer demands, and could very well offer that organic Himalayan cake baked in Spain, it just simply isn’t economically viable for them to spend more time on the unusual when there are so many people out there looking for sponge cake.

So what does a financial version of an organic Spain-baked Himalayan cake look like? These are businesses that have a niche lending request; be it a production line for a factory or a commercial vessel for a marine surveyor, an MRI scanner for a medical centre or a detection machine for an oil and gas plant. These businesses want to deal with a lender who is familiar with their type of request. It is in these cases where more time needs to be spent with the client to understand their needs and where a specialist finance facility needs to be tailored to accommodate their requirements.

Amount plays a big part too. Some businesses are viewed as ‘too young’ to borrow from banks and do not have a long track record, or the profile of the client might mean that the bank has a limit to the amount they are prepared to lend. Again, with a mandate to spending more time looking at the intricacies of a business, a finance company can find areas which allow them to become more comfortable with the amount they are willing to lend to a particular business. This is achieved by charging a higher rate of interest… Well, there has to be a price to pay if you’re looking for exotic gateaux!

So banks are here to cater to the needs of the sponge lovers out there, and finance houses to look after those needing something specialist. But how do finance companies finance themselves? Although banks don’t have a large appetite for lending to a more niche sector, they do have an appetite for lending to finance houses. Why? Banks know there is a market for this type of lending out there, they know that there are people out there who need Spain-baked Himalayan cake, so they lend to finance companies and gain indirect exposure to this market, without having to climb mountains… There are too many sponge lovers out there for banks to spend their time up mountains. Instead, the finance company will climb the mountain, meaning that all businesses, no matter how usual or unusual their lending request, can have their cake, and eat it.

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