Following the 2008 Global Financial Crisis, Banks and larger Financial institutions were forced, by a combination of market conditions and increased regulations, to significantly tighten their lending standards. This financial conservatism has essentially closed off the traditional credit market to smaller companies, and has opened the door to specialty finance firms to play a larger role in providing structured finance options.
Specialty finance can be broadly defined as any financing activity that takes place outside the traditional banking system. Typically, specialty finance firms are non-bank lenders that make loans to consumers and small to midsize businesses that may otherwise find it difficult to obtain financing. Peer to peer lending also falls into this category
Unlike banks, specialty finance firms tend to rely on their own due diligence of the opportunity rather than ensuring that a borrower fits into the traditionally defined “credit box”, upon which many larger financial institutions operate.
It is imperative to work with an experienced and diligent originator or fund manager to ensure the potential risks for these opportunities are appropriately explained, discussed and managed.
Historically, these deals have generally been reserved for hedge funds, institutional investors and family offices. With the emergence of new technology platforms, accredited investors may also invest in these specialty finance opportunities. Typically, specialty finance presents a valuable opportunity for beginner investors and finance professionals to diversify and protect their portfolios from downturns, whilst earning high yields.
