Colonnade publishes industry commentary on small business financial services.
The small business financing market opportunity available to non-bank lenders is large and has expanded as banks retreat. Non-bank commercial finance firms use various business models to originate transactions and manage risk. Newer entrants are deploying online platforms in an effort to rapidly gather assets and gain market share. Traditional firms rely on established origination channels and analytical tools but are generally augmenting their platforms with technology investments to speed response time and efficiency. Some firms are acting as intermediaries – originating and underwriting transactions for other lenders (usually banks) that lack the focus, expertise, or scale to build their own specialized origination engines. The small business financing market is fragmented, creating opportunities for new and existing players.
Private equity investors and venture capitalists have taken note of the shifting dynamics in small business lending and have increased investment activity in this space over the past several years. A successful, growing commercial financial services firm can deliver attractive returns to investors. Exit opportunities vary depending on the business model and product focus of each enterprise, but liquidity paths include sale to commercial banks, sale to other non-bank strategic investors, sale to other private equity firms, and initial public offerings. M&A transaction activity in the past several months points to the re-emergence of commercial banks as buyers of small business finance companies. Other non-bank strategic buyers are also active.
Small business lending is a significant, growing segment of the financial services sector. Many small business finance companies enjoy high asset margins and have attracted a broad range of investors and debt sources, including the asset-backed securities market. The overall M&A market for specialty finance companies remains robust, and interest in online lending remains strong in spite of recent challenges facing some of the first generation FinTech lending firms. We expect to see continued high levels of acquisition and capital markets activity in small business lending over the next two years; the slowdown will likely hit when the current economic expansion comes to an end.