Tag: business loans

Media and finance industry need to work together to show that P2P comes in more than one flavour

Author
Angus Dent
Date

Once again, we find mainstream media treating the diverse alternative finance sector as one homogenous group and misleading or alarming investors in the process.

This time, we have Ruth Lythe of the Daily Mail launching with a headline on 7 June, “MPs attack risky online firms offering 7% returns from lending savers’ cash to strangers to buy cars and even phones”.

The article refers to Zopa’s recent announcement of its point-of-sale partnership with Unshackled.com.

In essence, the article can be summarised in one of the lines within it: ‘P2P loans are risky’.  This is written without providing any context for the reader, which is both naïve and does a great disservice to existing and potential investors.

  • A comment on the losses experienced to date by peer-to-peer investors would have been good (they are below what the banks accept as ‘normal’ and are published by the largest platforms in the smallest detail for all to see, which is something the banks never do).
  • A comment on the variety of models available in P2P would have been helpful too, rather than bracket everything under one, doom-laden label.

Of course a judgement has to be made when investing in peer-to-peer. Judgement is required in most forms of investment, but what really matters and needs explaining when making sweeping assessments of this nature is how the likelihood of loss is mitigated and managed, which differs from platform to platform.

In the case of Archover, all business loans have to pass the scrutiny of not only our own lending specialists, but also those of leading credit insurers, who provide cover on the underlying asset that we use as security. If we were even tempted to lower our standards we would not be allowed to do so. I know of no bank that can provide that same level of comfort.

Daily Mail Old

In other parts of the market, RateSetter and others have provision funds which cover all losses. This means that, to date, nobody has ever lost money lending over their platforms. The banks rely on the good old UK tax payer for such a guarantee.

I think I speak for the entire industry here when I say the FCA is doing an excellent job in making sure investors are as informed as possible about the nature of their investments.

Andrew Tyrie’s letter to the FCA on behalf of the Treasury Select Committee is perfectly reasonable and I have no doubt the Regulator will provide a full and well considered response in good time. This will no doubt include some of the facts, such as net returns for investors after default being in the range of 5%-7% since the inception of the industry, the never before seen level of transparency in financial services and the resilience of the sector to economic shocks – even against the most stringent scenario laid out by the Prudential Regulation Authority (PRA).

The Regulator will certainly have our full backing if even more improvements can be made to help investors.

As an industry, we do not criticise the Daily Mail or the media at large for advising caution, but we do implore it to examine the facts and make a more rounded assessment on behalf of its readers.

The Problem of Late Payment

Author
Angus Dent
Date

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Late payment is one of the greatest challenges faced by this country’s small businesses. Not only does it limit their ability to grow by choking their cash flows, it also causes employees to waste time chasing payment which could otherwise be spent more productively.

The government knows this, and changes to late payment legislation stand as the latest addition to their basket of policies aimed at easing the burden shouldered by small businesses. Their objectives here are commendable, but as I wrote recently when discussing their efforts to tackle red tape, getting cold hard results may prove difficult.

The ‘Prompt Payment Code’ set up by the government seven years ago has certainly not had the desired effect. Signing up to this voluntary measure means that a business is bound to certain payment terms, but, somewhat predictably, only 1,700 businesses have got involved. More recently, the EU launched their Directive on Late Payment in an attempt to instigate a 60 day payment window. But a loophole allowing longer payment terms if the supplier agrees has hamstrung this policy’s potential. Food giant Mars have reportedly capitalised on this loophole, increasing their payment terms from 60 to 100 days and using their market power to coerce suppliers into agreeing, or facing the possibility of losing contracts.

late pay

There are legal options available to the victims of late payment; businesses can charge interest to their debtors, for instance, but only 10 per cent of SMEs are reported to have used this for fear of losing business. With the IT Firm Sage estimating that some £55bn is currently owed to the UK’s SMEs, there is clearly a need for a more workable solution.

The government’s newest initiative is named the Small Business Conciliation Service and uses an Australian model as its precedent. The Service will be used to mediate disputes between debtors and creditors and thus smooth the payment process.

Yet even if this Service becomes a tremendous success, late payment will not disappear overnight. And as Professor Nick Wilson of Leeds University Business School points out, at the moment “[SMEs] have insufficient capital to cope with bad debts and late payment. We need greater bank lending and equity investment.”

But as we know, the banks aren’t lending. So where should SMEs look? For many businesses, the burgeoning alternative finance sector could be the answer.

Banks ‘Straitjacketed’, Alternative Finance Growth ‘Fantastic’

Author
Charlie Mahalski
Date

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Thanks to the jaded approach to economic policy of the two main political parties we have no balanced, imaginative and focused ideas to provide hope for pulling us out of recession and rebuilding the economy. At ArchOver, we believe that an economic policy focused on small companies is the ‘big idea’ that is needed.

Small businesses are the lifeblood of our economy. They dominate employment and vital innovation. There are five million such businesses giving direct employment to at least 11 million people. A further circa four million aspire to work for themselves.

We recognise good ideas when we see them and the right wing but independent think tank, The Centre for Policy Studies, has produced a paper ‘The Road From Serfdom’ which brilliantly outlines the importance of small companies to the economy.

The paper was written by Lord Saatchi, a former chairman of the Conservative Party and a Thatcherite to his bootstraps. Margaret Thatcher was excited by the idea of popular capitalism and, in the context of attracting secured and insured capital to fund small companies, so are we.

In a closely reasoned paper, Lord Saatchi suggests that if all corporation and capital gains taxes were removed from small companies, the £11 billion cost to the Treasury would be eradicated in the life of one Parliament and then we would have the annuity benefit of small companies to lift and revitalise the economy for the future.

We are sceptical about the political appeal to our jaded leaders of the £11 billion cost, in these straightened times, but we like the imaginative approach.

Small companies are about economic growth but they are also about social well-being. People who run small companies are able to follow their own instincts and ideas. They avoid the frustrations revealed in a study of 1,000 young employees by the financial services firm EY. It has found that fewer than a third believe that the companies they work for are sufficiently innovative and 82 per cent claim they have ideas that might have been used to create new opportunities for their organisations had they been not ignored. As a result, a stonking 70 per cent of these young people would rather set up on their own than work for somebody else.

The two major parties have paid lip service to helping small businesses and credit must be given to Government initiatives to make it easier to register patents and making it less onerous to set up companies. There is also the support that’s been given to small businesses and, in particular, to the alternative finance, crowd-lending sector, through the Business Bank. These are worthy initiatives but they are tinkering at the edges of the issue. Now, radical policies are needed to rebalance the whole UK economy in favour of small companies.

The fact that the banks have been put in a straight jacket by European Union Basel III agreements, which stop them from lending, is killing small business. The Bank of England has pointed to the fact that just four banks control more than 80 per cent of all lending to companies. It identifies a £14 billion annual shortfall in lending to those vital engines of our economy.

The alternative finance sector can be a major source of finance for these small companies. It is growing at a fantastic rate partly because low interest rates attract investors who are seeking higher returns and also because both lenders and borrowers are sick of dealing with the banks and other large financial institutions. The brand new sector shows every prospect of being able to fill that £14 billion gap and more.