Peer-to-peer lending growing in popularity

P2P lending is becoming a significant alternative source of financing for SMEs in the UK. According to Entrenching Innovation - The 4th UK alternative Finance Industry Report, published in December 2017, P2P business lending grew from £21m in 2011 to £1.23bn in 2016, generating £3.14bn over the six years. The report noted that the annual growth rate in volume from 2015 to 2016 was 40%.

The report cited data from the British Banking Association that revealed P2P business lending equated to 15% of new small businesses loans. More than a fifth of borrowers had a turnover of less than £500,000 and 23% were in the £500,000 to £1m turnover bracket. It also found that lenders were biased towards localised funding. This diversity of lending across the UK suggested that P2P business lending could become “a suitable solution to systemic geographic biases that exist in traditional and bank SME lending”.

Figures from the Peer-to-Peer Finance Association (P2PFA), published earlier this year, reinforce that view, with cumulative lending by members of the association reaching almost £9bn to the end of the first quarter of 2018. Almost 150,000 investors provided loans to more than 50,000 businesses and 221,000 consumers. Business loans, in particular, enjoyed a very large increase, with a 35% rise in net lending from the third quarter of 2017, and represented nearly 64% of total lending.

A list of P2P lenders on p2pmoney.co.uk contains 133 companies that operate in the UK, along with another seven that have not yet launched here and seven more that did not launch. But while that list sounds impressive, it’s worth pointing out that, according to p2pmoney.co.uk, 31 of the 133 companies have stopped providing P2P lending. Of the remaining 102 companies, half provide P2P lending to businesses and several of those have an exclusive focus on property.

It’s also worth noting that along with those that have pulled out, others have changed their focus. When MicroScope covered the subject of P2P lending in April last year, one of the most prominent businesses was RateSetter, which had invested more than £1.8bn. One of the examples we cited was a £200,000 five year loan to Salesforce platinum partner, makepositive.

At the time, Paul Marston, managing director for commercial finance at RateSetter, revealed it had made a number of loans to ICT businesses and stressed that it was “not the lender of last resort, we want people to come to us instead of their bank. We have great technology, great people and a simple online platform”.

He argued P2P lenders could be attractive to IT businesses who might find it difficult to approach banks “because they often don’t have the tangible assets that banks look for”.

Things have changed quite a bit since then. John Battersby, head of communications and policy at Ratesetter, reveals that the company has “refocused our business lending away from unsecured loans to small business to now only offering finance secured on an asset”.

It may not come as much of a surprise to discover that he doesn’t think Ratesetter has “lent to any ICT companies under our secured lending arrangements (it is mainly used by property developers and motor finance businesses), although the unsecured loans we wrote in the past are not affected by this”.

Nevertheless, P2P lending is in rude health and it is becoming more widely considered by small businesses. As Mike Cherry, chairman of the Federation of Small Businesses (FSB), observes: “P2P loans have massively grown in popularity among small firms over the past few years. Back in 2015, around one in 20 small business finance applicants sought a P2P product. Today, that figure is more like one in 10.”

He believes it a good sign that more small firms are “considering all of their options in this space – we’ve also witnessed the rise and rise of asset-based finance”. 

The wider range of financing available to small businesses the better, Cherry adds. “There’s no one-size fits all option when it comes to small business finance – rather, it’s vital to consider all opportunities. Too many small business owners apply for a loan at the bank they’ve always used as a consumer then throw in the towel if they’re turned down. That needs to change.”

There are a number of signs of how well P2P lending is moving into the mainstream. For example, P2P lender ThinCats recently announced a programme with global asset manager Insight Investment to provide up to £300m for commercial loans to SMEs. This is in addition to the £300m it already has from existing investors.

ThinCats managing director, Ravi Anand, said the agreement would “allow us to continue to support the growing UK SME market with the highest credit and security metrics as determined by ThinCats’ proprietary and market leading SME risk model.”

The company has previously argued that alternative finance “is playing a positive role in increasing the productivity of British industry”, claiming that more than 80% of the businesses it has funded have seen an average growth of 14% in employment. Among the clients it has funded are £1.2m for managed serviced office solutions company DHR Business Solutions and £1m to Scottish IT support and connectivity services provider Network ROI EOT.

Another indicator of the growing strength of P2P lending can be found in the news that one of the largest companies in this space, Funding Circle, is currently gearing up for an IPO with a valuation of up to £1.8bn. The company has an estimated £2.6bn of loans under management, with £163m loaned to IT and telecoms companies. This makes IT and telecoms the fifth largest sector for Funding Circle loans, behind Property and Construction, Retail, Professional and Business Support and Manufacturing & Engineering.

Not everything has gone smoothly. Earlier this year, it emerged that Funding Circle was the joint largest creditor for Firstnet Solutions, which went into liquidation in February owing more than £1m to creditors. According to the directors report, Funding Circle was owed over £200,000.

Funding Circle acknowledges that bad debt is a normal part of lending to businesses but adds that bad debt levels on its platform have remained stable over the years at approximately 2-3% per year. Investors typically earn 5-7% on loans after fees and bad debt. The company stresses its data “shows there is no difference in performance between ICT companies and other industries”.

Jack Pritchett, Funding Circle senior communications manager, argues that lending platforms, such as Funding Circle, “are rewiring the financial landscape to give small businesses and investors a better deal”. He claims this is because Funding Circle’s platform cuts out the middleman so “businesses can access fast and flexible financing through our simple online application, allowing small businesses to access the capital they need in days, rather than months”.

Because Funding Circle operates online, Pritchett says it is “able to support small businesses across a wide range of sectors, industries and regions. I.T and telecommunications companies represent our 5th largest sector in terms of loans outstanding in the UK, and we're pleased to see these vital businesses getting access to the finance they need to grow”.

There’s no doubt that P2P lending can provide a viable alternative means of finance for SMEs when they face difficulties with banks and other sources of finance. As The Entrenching Innovation - The 4th UK alternative Finance Industry Report notes: “Peer-to-peer business lending is becoming an increasingly material contributor to SME lending in the UK compared to bank lending.”