“A proper bank replacement”? An interview with Nucleus boss Chirag Shah

Nucleus CEO calls Brexit “the best opportunity for us to establish ourselves as a key part in the UK business credit market”.  

When Nucleus Commercial Finance launched, they thought they were “the alternative capital”, to quote CEO Chirag Shah. That was almost five years ago. A dizzying array of new-age, fintech lenders have emerged since, consigning offline alternative lenders to the less heady middle ground between bank and technology-based disruptor. But with over £400m in cumulative lending to SMEs under its belt, Nucleus is now out to make some noise. The platform, which offers a range of funding solutions to businesses both large and small, is transitioning into a more tech-oriented outfit – particularly on the front-end.

I caught up with Shah to learn more about these changes, and to better determine Nucleus’ place within the alternative finance market. Shah has a background in structured finance, having served stints as Merrill Lynch, Wachovia and a London-based hedge fund with £1.8bn under management, where his main focus was asset-backed lending.

A differentiated offering?

Shah sees the range of products offered by Nucleus as a key differentiator within the alternative finance space. “We have a wide suite of products which the banks offer,” he said. These include invoice finance, asset finance, property finance, business overdrafts and terms loans (including unsecured term loans). The company’s property and asset finance operations were only set up within the past year, but Shah insists that the company has all the necessary expertise for entering into these new market segments, and points to the company’s track record as evidence. Of the £400m lent out to date, Nucleus has suffered just £5,800 in bad debts. What’s more, the relatively short average terms attached the platform’s products have meant that a large proportion of what has been lent out on a cumulative basis has already been recovered. “90% of the money lent to date has been repaid,” said Shah.

Shah sees the range of product types offered by Nucleus as a key reason that the company is able to cater to larger business borrowers than are typically found within the loan portfolios of alternative lenders. Shah says that having a strong mix of products becomes “even more critical at the larger end” of the business spectrum. He gives the example of Nucleus’ largest deal to date, which is a £14.5m facility. This facility is comprised of £11m in invoice finance, £2.5m against property and £1m against assets (plant and machinery). “Where we are pitching ourselves is we want to be a proper bank replacement,” explained Shah.

Of course, the very fact that Nucleus can cater to larger businesses is a differentiator in itself, but it comes with complexity. Shah says that larger businesses are not simply concerned about getting a quick funding hit – what they really need is a relationship. “They are as worried about us as lenders and we are about them as borrowers,” said Shah. He says that businesses that are turning over £10m or more will have a proper finance team with a full-time financial director, and they will be anxious to ensure that their lenders are not going to fall over and leave them in the lurch. Shah thinks it’s difficult for earlier-stage, fintech solutions to provide that level of assurance.

He also sees concentration risk as a barrier to entry for alternative lenders that focus on larger businesses. “It’s not the easiest segment to get going in,” said Shah. “It’s different lending £30k to 30 different businesses – if one of those doesn’t pay, the lender can manage. On the other hand, if you lend £1m to two different businesses, and one doesn’t pay, that’s a massive difference. It requires risk infrastructure to manage those facilities.” Shah is confident that Nucleus has that infrastructure.

On the value of technology

Nucleus is not looking to become a peer-to-peer lender. The company is funded by over £150m in debt capital lines from institutional investors. But Shah sees a great deal of value in the front-end of online lending outfits, and has set about emulating certain aspects of these companies.

When asked to expand on why Nucleus has transitioned towards a portal-based approach, Shah said: “It’s two fold really. The first reason is to increase the number of enquiries that we get. The second is, if you look at our time spent on deals, we end up spending 80-85% of our time on deals that we don’t do, and of that probably 90% of the time we could have picked up that we don’t want to do that deal a lot earlier in the cycle. So what we are doing is developing filters. The next step for us is to allow people to apply online. Once you get the company registration number, a lot of the work will already be done. We have trialled this process with deals that we have rejected and found that we could have saved half our time.”

But what of the uncertainty that is plaguing fintech lenders at present? Does Shah anticipate any fallout from recent events at Lending Club, for example? “Not really because the headwinds are there, but they’re there for people that are trying to raise capital, be it equity capital or debt capital and those that do not have a strong differentiating offering in the market,” said Shah.

On competing with the banks and the Brexit opportunity

Shah is firmly of the opinion that the recent referendum result, rather than representing a potential threat, is a major opportunity for alternative lenders. When asked what’s changed since Brexit, Shah said: “The only thing that we have seen change is the phones are ringing off the hook. A lot of lenders have backed out last minute on big deals, big transactions, which has created real problems for many borrowers, and we have been inundated with inquiries. It’s probably been the busiest two weeks in terms of new deals”.

Governor of the Bank of England Mark Carney recently took steps to free up $150bn in bank lending, through the reduction of the UK countercyclical buffer rate from 0.5% to 0%. Shah thinks this will help SMEs, but added “it’s not like turning the tap on and water coming out”. Besides, the Nucleus boss doesn’t see availability of capital as the key cause of declining bank lending. “It’s more about their processes, their systems which are so archaic and about how long it takes to get something in place with them,” said Shah. “They have strict credit criteria which to a large extent are going to become stricter. So having more capital doesn’t really help.”

Shah says that banks were one of the biggest beneficiary groups of the EU, and that the Leave vote will absolutely have a negative impact on bank lending. He believes that property-backed lending will be worst affected, but says that he’s seen large transactions cancelled across the board. “It’s the best opportunity for us to establish ourselves as a key part in the UK business credit market,” said Shah.