Peer to Business Lending
Alternative Finance Sector Report - November 2014
10
PEER TO BUSINESS LENDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
November 14
AUTHOR
Luke Jackson
Samantha Goins
25 -
THE INVESTMENT CASE FOR
SME LENDING
LENDING TO SMEs
SMEs account for 99.9% of all UK
business entities and are vital to the
growth of the UK economy. They account
for a vast range of products and services
that we have come to rely on, this they
provide essential jobs and tax revenue.
Access to finance is important for
funding investment, ensuring businesses
reach their full growth potential, and
for funding new business ideas and
start-ups. Some finance may come from
company profits, but often businesses
need to look to external sources. The UK
is currently seeing a sustained period of
economic growth, which in turn improves
the confidence of SMEs and makes them
more focused on expansion and growth;
Demand for credit across all business
sizes increased in the first quarter of this
year.
The major issue for SMEs is that they
are limited in their ability to fund
growth unless they have assets or
security to provide that they can use as
collateral. Banks may provide an invoice
discounting facility or an overdraft
secured against company assets, both
of which are very traditional lending
products. The issue often arises when the
company’s assets are already pledged to
a bank or other lender, the sales ledger is
full or more working capital is required to
pay suppliers and fulfil sales orders.
Many SMEs are now turning to new
innovative funding solutions such as
P2B platforms and non–bank financing
institutions. This can help to provide
essential finance, which can often be
cheaper and much easier to access than
via traditional methods. But businesses
still need to ensure they are profitable
and have assets or other guarantees
in place to secure against loans if their
balance sheets are not significant and
their cash-flow generation not very
strong.
For P2B platforms the challenge is
building their SME customer base from
scratch. Many SMEs will not have used
this avenue of funding before, may
have never heard of it, or might just be
sceptical as to whether it is suitable for
them. As word spreads, and platforms
increase their size and influence in the
P2B marketplace, they are likely to see
ever increasing demand from SMEs
looking for finance.
‘Alternative finance solutions are growing
very quickly, at over 250% per year, and
have provided £1.74bn to UK businesses
in the past two years, including nearly
half a billion to SMEs.’
25
Richard Fossett,
CEO of TradeRiver Finance
ROLE WITHIN A PORTFOLIO
For investors, lending to SMEs through
P2B platforms can provide emotional as
well as financial benefits.
Financial benefits include steady, fixed
returns which are higher than other
savings products; diversification across
a number of small loans or different
economic sectors; defined investment
terms; capital repaid on maturity; asset
backed investment opportunities; a
wide choice of underlying investments
and sectors; and increasingly liquidity
provided through platform marketplaces.
From an emotional standpoint, this
sector gives ordinary investors the
opportunity to help SMEs and the UK
economy, rather than lining the pockets
of mainstream finance providers.
Investors can pick and choose where to
lend their money and see that money
being put to use by the borrower. This
can allow investors to meet their ethical
or emotional objectives, through lending
to renewable energy projects or only
companies that have a positive impact on
the local community for example.
FINANCIAL BENEFITS
Financially the headline gross returns
on offer from P2B lending make it a very
attractive option for investors looking
for alternatives to cash and bonds.
Investment offerings vary
greatly: from very low-risk/low-return
(which could be a viable alternative to
cash) to higher risk
projects with returns that challenge
mainstream equities and sometimes still
come with substantial tangible security.
There is no standardisation of risk
return categorisation across platforms
as yet, although the FCA will no doubt
make inroads into this as time goes on
(The sector has been regulated
since April 2014). Investors can benefit
from the range of returns on offer, and
choose investments that match their
attitude to risk and capacity for loss.
Low-risk opportunities are available for
cautious investors, which still provide
higher returns than are available
through mainstream bank account
savings products.
In the current period of low interest rates
investors must take the rate of inflation
into account when assessing any savings
or investment opportunities. With the
consumer prices index (CPI) currently
at 1.2% (in October 2014) (falling from
1.5% in July), and the retail prices index
(RPI), which many see as more significant
to their personal circumstances as it
also includes housing costs, currently
