Tag: marketplace lending

PWC’s report on Marketplace Lending is a reminder of the sector’s Virtues for Investors

Author
Angus Dent
Date

The buffeting that the alternative finance sector received from Adair Turner on the BBC earlier this year has been proceeded by a relatively quiet three months for the industry, in the press at least. In a sense, the furor surrounding a potential Brexit that will reach a peak in the next month or so has come at a good time – it has allowed peer-to-peer lending platforms to knuckle down and continue the sustainable growth of 2015 into 1H16. The unwelcome comments of the uninitiated are otherwise caught up clamouring “in” or “out”. However the sector has been affected by the unsettling of potential lenders who are nervously waiting to see what will happen before deploying more capital or their first capital in the sector.

Uncertainty is always bad for business at any rate, so the excellent “Roadmap for Marketplace Lenders” report published by PWC recently reminds us. The Roadmap should be seen as a welcome reminder to existing lenders who are starting to let their doubts creep in that the foundations in the sector are solid. The report can be found here– it gives a detailed guide as to how marketplace lending platforms have evolved, and the future for new entrants into the space. PWC attribute the success of any marketplace lender to four main pillars:

  • Build the foundation
  • Refine the core lending business
  • Expand and innovate
  • Look beyond core lending

The report is specifically aimed at aspiring smaller marketplace lenders, however it contains industry insight that serves to highlight the benefits to anyone looking to start investing or lending over marketplace platforms as well. The key to the innovation in modern finance as a result of marketplace lending has been the ability of platforms to identify very specific niches as a focus, rather than act as what PWC calls a “single homogenous force” aiming to disrupt anything and everything. It is crucial that investors and lenders buy into the ethos that working with and alongside traditional forms of finance in a democratic fashion is exactly what “Fintech” is all about- the PWC report aptly emphasises this at length. It isn’t, as Turner would have you believe, a razzle-dazzle load of unregulated cowboys looking to make a quick buck by gazzundering the banks and taking advantage of naïve retail investors by lending to un-creditworthy borrowers.

A lot has changed since the early days of simple “peer-to-peer lending” that was pioneered by Zopa ten years ago. The name is still the moniker that platforms such as ArchOver are happy enough to abide by, alongside many others of course. Regretfully the terminology and nomenclature in the alternative finance industry can be confusing and worse still completely misleading. Partnering with institutional investors, and indeed the banks, on the same terms as the rest of the crowd is the true innovation. It has allowed everyday savers to avoid the complicated and risky world of stocks, shares and expensive wealth managers and give them the chance to take control of their savings and lend money alongside savvy funds, corporate and institutional investors at competitive interest rates. The PWC report may seem like it is stating the obvious, and to a certain extent so does this blog post- but in times of uncertainty it is the simple facts that need to be accentuated to reassure lenders and investors that alternative finance remains an attractive propositions.

Jargon busting the journey from Startup to SME: Part II

Author
Angus Dent
Date

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So far then, our startups have traversed the so-called “valley of death” and toiled their way to revenue generation and potential profitability. First they took seed funding from friends, family and angel investors to kick start business development, then they looked to professional investors for series funding to provide working capital, strengthen areas such as sales and marketing, and perhaps even facilitate expansion of property and other assets. So now that these startups are past the early stages of the business cycle, where should their directors turn to fund the next phases of business growth and development?

All these companies will now have traded for at least a few years, acquiring a financial track record and hopefully a steady customer base too. This increased business maturity and stability tends to translate into lower risk (and lower reward) for potential investors, an evolution in the risk profile that changes the nature of the available sources of finance.

Some companies with more robust balance sheets will now be in a position to seek out senior debt in the form of loans secured against assets of the business. Senior debtholders are those that are most likely to be repaid in the event that a business gets into financial difficulty. Gaining a loan from a bank at this this stage of development is notoriously difficult however. As such, businesses are increasingly turning to newer sources of finance, such as marketplace lending platforms, to provide them with the credit lines they need.

Others businesses that lack assets against which to secure debt, or the stable cash flows to service it, may look to invoice financing to improve their cash flow. Invoice financing can be split into discounting and factoring, both of which involve the third party finance provider advancing the money owed to a business by its customers, minus a service fee. With factoring, the finance provider takes control of the debtor book, whilst with discounting the relationship between a business and its customers is left untouched.

jargon part ii

For those businesses that seek to expand aggressively though, either of these forms of financing alone may not be enough, leading them to seek out mezzanine finance to help them achieve their goals. Mezzanine finance is usually unsecured and sits behind senior debt in terms of repayment priority. Because of this increased risk for the lender, it carries a much higher interest rate and also a clause that converts the debt into equity in the company if the loan is not repaid.

The above types of funding will suffice to meet business requirements of many companies, allowing for growth whilst keeping ownership in private hands. At the end of the financing road though, for those that choose it, is an IPO, or Initial Public Offering. There are a number of reasons why a company might consider ‘going public,’ such as reducing the burden of interest payments or generating publicity. Over and above any of these considerations though is the ability that being publically listed brings to raise large amounts of capital on a consistent basis. That said, firms must take into account the significant costs of the listing process, as well as the increased regulatory requirements that will be in place once public.

And so with IPOs we reach the end of the startup cycle, and the jargon that comes with it. It goes without saying that following the path through from seed funding to listing involves a huge amount of hard work and I dare say an element of luck. But with 99.3% of UK private businesses ranked as “small firms,” it is a journey we must hope many will complete successfully.

A Response to Robert Reoch’s article on The Growth Outlook for Market Place Lending

Author
Angus Dent
Date

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Thomson Reuters recently published an informative blog post in which Robert Reoch offered his views on the “growth outlook for marketplace lending.”

In his role as Global Head of Products and Strategy at Crowdnetic, a provider of technology and market data solutions to marketplace lending companies (MPLs), Robert is part of a team which aims to educate investors and institutions on the direction in which the  alternative finance industry is moving. MPLs have been quick to offer an alternative finance source to SMEs, providing a service distinct from the antiquated and costly financing options that banks in particular had been providing. And as the industry has grown, innovation by FinTech companies has seen the provision of increasingly niche and bespoke services, as competitors attempt to stand out from the crowd and bid to woo investors. Yet I agree with Robert’s statement that “there is real economic benefit for banks to actively collaborate with MPLs” in order to attract prospective borrowers.

MPL subsets

The MPLs that are most successful could be those that actively maintain a symbiotic relationship with a specific bank or banks. The banks would provide the MPL with a network of suitable borrowers who at the moment just aren’t aware of the opportunities out there.In return, as pointed out by Robert, banks can keep their fee-paying client “without the associated balance sheet and the capital cost”. In light of such exposure, the cost is minimal for the MPL, who would also save on often unnecessary and expensive advertising campaigns, especially as a much smaller group of institutions rather than a large pack of individuals is increasingly seen as the future of the ‘crowd’. This in turn helps Borrowers, who can receive funding faster and with a lessened prospect of a project going unfunded.

MPL bank lending

As Robert alluded to, it remains to be seen how much of the enormous market MPLs can gain access to. After all, a percentage point or two would transform the MPL industry and create a flood of funding to SMEs. The timing couldn’t be better. UK business lending from banks in June 2015 saw the sharpest fall – almost £5.5 billion – in at least four years (since records began). And with SMEs positioned as the main drivers of UK GDP, it is in the best interest of all involved that these businesses receive the finance they need to grow. Marketplace lending companies will be chomping at the bit to fill the void left by the banks; it remains to be seen when the shift happens.

UK Peer to Peer Finance Report

Author
Angus Dent
Date

P2P Growth

Here is a link to a research note from Paul Hill of Equity Development looking at the explosive growth, trends and dynamics of the Peer to Peer Finance market within the UK .

This report summarises what is a rapidly evolving and highly diverse model of finance, which has more than doubled in size year on year from £267 million in 2012 to £1.74 billion in 2014.

UK P2P Finance February 2015