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Peer to Peer lending – a viable alternative to traditional bank lender or just a passing fashion?

Andy Wise, Director, Thames Valley Asset Finance

Andy Wise, Director, Thames Valley Asset Finance

Peer to Peer lending has been in existence in the UK market place now for some 8+ years. However the first “peer to business” lender only appeared in 2010, this being the London based company called Funding Circle.

Before we look in a little more in-depth at the way small and medium sized businesses can benefit from P2P, let us first understand what this form of lending is.

Definition (courtesy of Wikipedia): Peer-to-peer lending (also known as person-to-person lending, peer-to-peer investing, and social lending; abbreviated frequently as P2P lending) is the practice of lending money to unrelated individuals, or “peers”, without going through a traditional financial intermediary such as a bank or other traditional financial institution. This lending takes place online on peer-to-peer lending companies’ websites using various different lending platforms and credit checking tools.

So why has P2P taken off and become so popular. Well, unless you have had your head buried in the sand since 2008, all of us (consumers and business owners alike) are well used to hearing terms such as “credit crunch” and “banking crisis”. It started as banks across the globe lent too much money, too quickly and in many cases the loans then defaulted or had insufficient security attached to them. So, rather like a pack of cards the whole banking infrastructure started to collapse. Banks had insufficient capital to meet liabilities as they fell due (i.e. savers withdrawing cash from certain banks they thought may go bust) and added to this, the UK along with many countries fell into a deep recession. Closer to home some well-known UK banks were also found guilty on a number of counts of product miss-selling, resulting in provisions for a large number of compensation claims. In summary, banks ran short of cash and as a consequence lending dried up!

As we approach 2014, the UK does appear to be turning a corner. Interest rates remain at historic lows, business confidence is slowly returning and UK PLC appears more optimistic about the future. However, the problems of 2008 are far from behind us and the banks still appear reluctant to lend at the required levels to UK businesses. In every crisis opportunities exist and this is where I believe P2P has gained momentum and popularity.

So how does P2P work? Typically an on-line lending platform (an intermediary such as Funding Circle) will bring borrowers together with investors. This is done by the borrower (an SME/owner managed business) approaching the investors for a loan via an internet site. An application for a loan is submitted via the P2P platform, (in much the same way as you would approach your bank manager for a loan). The borrower will have to outline their business’s background; he/she must explain what the business does? Why it is profitable? How much it needs to borrow? Over how long it requires the loan?….and crucially what the money is to be used for? Just like a request for a traditional bank loan, financial information has to be provided, to include the last year end accounts, any current year management accounts and details of current debt levels and working capital facilities (e.g. Factoring, invoice finance or overdraft limits).

The borrower’s loan request will then be looked at and assessed by the P2P intermediary’s “in house” funding team and if the P2P intermediary can see a viable business and a clear “ability to repay” the loan, it is then advertised on the P2P website for investors to “bid” on.  Investors are typically private individuals looking to earn a better return than they are currently receiving for funds held in a bank deposit/savings account. Once the loan request goes “live”, investors can bid amounts of typically £10 and upwards.  They can also indicate what percentage return they want for their investment (subject to minimum bid rates suggested on the web portal and set by a “risk weighting” assigned to the borrowers business by the intermediary). The better the businesses financials are, the lower the minimum bid rate and therefore the lower the overall interest rate/borrowing costs. They (investors) can also ask the prospective borrower questions about their business or its financials, the borrower then having a choice whether to reply or not (it is advisable to do so!).

Once the loan is 100% funded, the borrower can elect to close the bidding and start the process of drawing down their loan. Alternatively, they can keep the bidding open in the hope that new investors lower their bid rates, remove the higher rate bidders and thus reduce the overall loan cost/interest rate.

The P2P platform provider will then take their “fee” from the loan amount (typically 3-4% of the sum advanced), with the borrower then signing the loan documents before the balance of the loan is deposited into their business account.

Worthy of note is that each individual investors name is listed on the loan document that the borrower signs, in my experience, this can be 200+ investors for any one loan! (Depending on the loan size)

Unsecured loans (Personal Guarantee only) normally range from £25,000 to £150,000, with loans over this amount requiring formal “charged” security (i.e. a debenture or a charge over company property/assets).

Loans can be used for a variety of businesses uses, recent examples include;

•  £100k to cover cost of moving premises and refurbishment

•  £50k for working capital to cover client payments and the expansion of a professional practice

•  £150k to employ new staff and working capital for a substantial contract secured with a large well known food retailer

Finally, it is worth underlining that the peer-to-peer industry adheres to standards set by the self-governing Peer-to-Peer Finance Association. Peer-to-peer depositors do not qualify for protection from the Financial Services Compensation Scheme (FSCS), which provides security up to £85,000 per bank, for each saver but the Peer-to-Peer Finance Association mandates the member companies to implement arrangements to ensure the servicing of the loans even if the broker company goes bankrupt.  As of October 2013, UK peer-to-peer lenders have collectively lent £600 million. The question is, will it continue to gain popularity and is it a viable alternative to traditional bank lending?

NB: Thames Valley Asset Finance has recently added a leading UK Peer to Peer lending to its funding panel, if you require further information or advice on P2P, to include its suitability to your business and the qualifying criteria, please get in touch by contacting me on 07787 551174 or emailing me at awise@tvaf.co.uk

Andy Wise
Director
Thames Valley Asset Finance Limited

 

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