Cauta Capital is well positioned to take advantage of growth in the Alternative Financing market by providing small and medium sized businesses simple financing solutions to difficult liquidity problems arising from recent regulatory changes within the European banking sector.
To fully understand the scope of the European Alternative Financing Market and its future growth potential it is necessary to reflect back upon recent history.
In the run up to the 2008 financial crisis the commercial lending practises within the banking industry exceeded proportions. The lack of regulatory oversight allowed the situation to eventually reach a breaking point.
THE BASEL COMMITTEE ON BANKING SUPERVISION
In the immediate aftermath of the financial crisis in 2008 access to credit through the banking system became extremely difficult due to a near freeze on commercial lending. In 2010 the international community with nearly 50 countries represented by the Basel Committee on Banking Supervision introduced the Basel III Accord which was ratified by the G20. The objective of this committee is to strengthen the regulation, supervision and risk management of the banking sector.
The Basel III Accord
The Basel III Accord is a comprehensive set of reform measures which serve to improve the banking sectors ability to absorb shocks arising from financial and economic stress, improve risk management and governance, and to strengthen bank’s transparency and governance. The economy is cyclical and continues as it has historically to rise and fall. However, the measures taken by the Basel Committee and the implementation of the Basel III Accord ensure that there is not a similar financial crisis and collapse of the banking sector that was nearly witnessed in 2008.
The Impact of the Basel III Accord on Commercial Lending
The Basel III Accord has seriously impacted commercial lending in Europe. Increased internal charges applied to banks have been passed to borrowers. Long term financing has been restricted. Collateral such as property and company assets such as machinery and plant equipment etc. no longer command the high valuations they did in the past. In many cases they are now not accepted forms of collateral. Certain lending activities have been restricted. The resources of many banks are now only allocated to top tier clients.
The Extent of Alternative Financing
Alternative financing is the fastest growing financing sector for small to medium sized companies in the world today accounting for $51 trillion worldwide as of 2011. As of 2013, academic research has suggested that the true size of the alternative financing system may have grown to over $100 trillion in 2012. According to the European Commission’s Green Paper on Alternative Financing, alternative financing accounts for 35-40% of all financing in the U.S., but accounts for less than 13% in Europe. Therefore, the growth potential of this market is huge.
The Demand for Credit
Europe is seeing astonishing growth in the Alternative Financing sector. The demand for credit remains strong however due to regulatory reforms banks now require more solid equity as well as steady cash flow in order to meet lending requirements. This can be difficult for small and medium sized companies to prove. This policy has put a stranglehold on banks lending to businesses who traditionally agreed lines of credit, using company assets as collateral. Based on the strong demand for credit outside the banking sector Cauta now receives many requests for Alternative Financing solutions leaving the company in the enviable position to choose only the safest and most profitable.
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