Meet the Investor: Rishi Khosla, OakNorth

Having injected £710m into small businesses since its 2015 inception, the bank's CEO says it's time entrepreneurs stopped defaulting to equity finance

Firm: OakNorth
Name: Rishi Khosla, CEO and co-founder

Where are you based?

We’re headquartered in London at 65 Curzon Street, but we have an operations team and call centre based on Queen Street in Manchester. We also have an office in Gurgaon, India where around 70 team members help with our credit analysis and underwriting.

What kind of investor are you?

We are a commercial bank that provides debt finance – loans of between £500,000 to £20m – to fast-growth businesses and established property developers.

We obtained our retail deposit taking license in March 2015 and began trading in September 2015. Since then, we’ve grown our loan book to over £700m and have completed more than 150 transactions.

By leveraging a combination of fundamental credit analysis with data analytics and machine learning, we’ve been able to service the UK’s complex small and medium enterprise lending market at scale.

To help fund our lending, we offer a range of retail savings accounts (fixed bond, notice and easy access) as well as small and medium enterprise savings accounts. We now have almost 15,000 retail deposit customers.

What kind of deals do you finance?

Our loans are developed with entrepreneurial business owners in mind – no off-the-shelf solutions, no computer-says-no decisions. We provide bespoke, structured loans, and focus on properly underwriting the business, with our team taking the time to understand the ins and outs of it as opposed to fixating on collateral.

Every loan we write at OakNorth is driven by the customer’s ability to repay it, which starts and finishes with a healthy cashflow forecast. Typically, our borrowers generate between £5m – £100m in annual revenue and must be profitable businesses or established property developers.

See more: OakNorth has pumped more than £710m into UK scale-ups

Two other very important factors for us are the management team and the growth history of the business – we want to work with individuals and businesses that are as ambitious as we are.

In terms of profile, we are sector agnostic and lend to businesses and developers across the UK – this year alone, we’ve lent to:

  • A family business in Liverpool to develop a 200-bedroom serviced apartment in the city
  • A restaurant chain in Northampton to open two new sites
  • A Dublin-based private equity firm to acquire a recruitment company
  • A manufacturing company in the East Midlands to fund a management buy-out
  • A nursery chain in the South East to fund the opening of several new sites…
  • And a property developer who will use the funds to develop 800 new homes in Birmingham

What do you look for in the management teams of the businesses you lend to?

Since our launch, we have been focused on one thing; solving the problem of scaling non-standard lending in the UK, backing quality management teams in the process.

One of our most recent deals – a £20m loan to Brasserie Bar Co. – will enable the business to open over 25 new sites and hire an additional 700 people. This is an ambitious and entrepreneurial business which, despite uncertain market conditions, has continued to expand every year since inception, even during the recession. The business is celebrating its 21st anniversary this year, yet has managed to stay fresh in an increasingly competitive market by expanding its offering into new formats and settings, and rebranding at the opportune time.

The management team, which includes CEO, Mark Derry, and finance director, Helen Melvin, is a perfect example of the kind of team we look to lend to. They have grown a fantastic business which we have no doubt will continue to go from strength to strength.

How do you source prospects?

We’re very fortunate in that approximately 25% of our deal flow now comes from existing borrowers – this is testament to the excellent relationships our debt finance team have with clients.

We also work with a number of brilliant brokers, intermediaries, debt funds, property funds and private equity houses who will often get in touch regarding deals they’re looking at.

What is your ideal loan?

We don’t really have an ideal loan; as long as a business is profitable, ambitious, has a strong management team, and is entrepreneurial, we want to work with it.

We offer flexible repayments, with both term and revolving credit facilities available, and aim to provide fast decisions, making sure that borrowers are kept up to date throughout the credit process.

In terms of property development, we lend up to a 75% loan-to-cost and 65% loan-to-gross-development value, and provide flexible repayments terms based on the build programme.

What are your USPs?

There are a number of ways in which OakNorth differs from other lenders in the UK. Our model essentially takes the best elements of venture/private equity (flexibility, transparency, speed and entrepreneurialism) and applies them to the debt finance model:

  1. Flexibility – Unlike incumbent banks who tend to only accept real estate as collateral to secure loans against, we consider multiple assets including stock, debtors, intellectual property, plant and machinery, etc.
  2. Transparency – We give clients the ability to discuss their loan requirements and growth ambitions directly with the Credit Committee – i.e. the decision makers.
  3. Speed – The personal approach outlined above enables deals – from first meeting to disbursement of cash – to typically be completed in three weeks or less and we’ve even done deals in as little as 48 hours. This is dramatically different to what you find at the big banks where it typically takes several months.
  4. Entrepreneurialism – We were founded by entrepreneurs so we have a very clear understanding of what our clients need and how we can help them.

What are the hot sectors?

In the last year, we’ve seen a lot of appetite for borrowing from the hospitality and leisure sectors – hotels, restaurants, bars, etc. –as well as the real estate sector. However, we’ve done deals across the board: healthcare, education, tech, professional services, etc.

I think a lot of people thought that Brexit would reduce the appetite for borrowing amongst small and medium business but we’ve seen the opposite. Prior to the vote, our loan book stood at £98m – today, it’s over £700m and we lent £100m in the month of June 2017 alone.

The reason for this? Large banks, who dominate the market and account for 80% of all small business lending, already have slow processes – Brexit has just made them slower.

Three things a company should be able to demonstrate to a business lender?

  1. Good cash flow
  2. A strong business plan being led by an experienced management team: When you are a fast-growing company, your need for cash is constant. As a result, it can be very easy to get wrapped up in sourcing finance and forget about the long-term business plan. It is important that business owners don’t lose sight of this and that they stay mindful of market conditions that could impact their sector – e.g. fluctuating exchange rates, reduced consumer spending, increasing food prices, etc. It is also important that the management team demonstrates the breadth of expertise it has and why that will enable it to survive tough economic conditions such as a recession.
  3. Ambition: Since our launch in September 2015, we have grown to 140 people, built a loan book of over £700m with a qualified pipeline of a further £700m, turned profitable, and attracted almost 15,000 retail deposit customers. We have no intention of slowing down and we want to work with businesses that are as ambitious and hungry as we are. Our clients are typically growing by 25% or more year-on-year and have a clear growth strategy.

What are the cardinal sins when looking for a business loan?

There are two:

The first is defaulting to equity finance. Many entrepreneurs who are propelled into a sudden growth trajectory think mostly about raising risk-sharing equity investment from venture capitalist, private equity houses, or angels. These are business owners who have a proven business model that’s making money, but who feel forced to dilute and choose equity finance because traditional bank finance isn’t fast enough, flexible enough, or collaborative enough. If you are an established, profitable business, there is no reason why you shouldn’t be able to secure debt, so don’t sell yourself short – consider all of your options and take the time to find the right financing structure for your needs.

The second is only speaking to your business current account provider when seeking a loan, rather than taking a whole of market view. According to the Competition & Market Authority’s Retail Banking Investigation last year, 90% of UK businesses bank with either Barclays, RBS, Santander, Lloyds or HSBC, and 90% of those businesses only go to their current account provider when seeking a loan. If they get a ‘no’, they don’t go anywhere else.

The assumption is that they’ll get a better rate or service if they go with their clearing bank but anecdotally on the market, we hear that it takes four to six months to get a ‘no’ from a high-street bank, and six to nine months for a ‘yes’. We even had one client who said it took their big bank seven weeks to sign the NDA! When you’re a fast-growing business looking to scale, these time frames just don’t work.

Our average completion time for a deal, from first meeting to disbursement of cash, is three weeks and that’s for loans of millions of pounds.

The large incumbent banks also tend to be very inflexible when it comes to the collateral to secure the loan against. Typically, they require real estate; a model that’s no longer fit for purpose in this age of falling home ownership (due to increasing house prices), and the rise of new industries where property assets aren’t required.

New, small banks like us are willing to be a lot more flexible and consider multiple collateral types – stock, debtors, plant and machinery, intellectual property, etc. – but if you never look beyond your clearing bank, you’ll never know.

What continuing involvement do you like in a loan?

Our slogan is “lending for entrepreneurs, by entrepreneurs” and that’s because we were founded by entrepreneurs, rather than bankers, so we understand what our clients need and how best to service them. We don’t want the only contact our borrowers have with us to be when they’re paying us back – we want to have a collaborative, ongoing relationship with them where we discuss a multitude of business aspects, not just finance.

We speak to our clients on a monthly, if not weekly basis, and have an ongoing rapport with them. We invite them to events we’re hosting or attending that we think might be of interest, we send relevant PR or marketing opportunities their way, and we have conversations with them about several business areas outside of finance – e.g. how to scale at speed without jeopardizing culture, how to recruit the right team, knowing the right time to exit, what to do after exit, deciding whether to go for debt or equity finance, etc.

It is this continuing involvement that has enabled us to get this far and is the primary reason why 25% of our deal flow now comes from existing clients.

How much success have you had so far?

As a bank, our underwriting is more akin to what you’d find at a private equity firm, than at a bank. Every month, we collect the financial performance data from our borrowers and input this into our proprietary credit models. This enables us to track how the business is doing on an ongoing basis, and flag any minor issues or concerns before they become major. Most large banks only do this if something goes wrong – e.g. a late payment – or if the loan is up for renewal.

As testament to the rigour and robustness of our underwriting processes, coupled with the quality of the businesses we’ve lent to, we’ve never had so much as a late payment (let alone a default!) and have had over £100m in repayments to date.


(will not be published)