Peer to Business Lending
Alternative Finance Sector Report - October 2014 13
PEER TO BUSINESS LENDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
November 14
AUTHOR
Luke Jackson
Samantha Goins
EMOTIONAL BENEFITS
Emotional benefits can often be unique
to different businesses or projects.
It can often be hard to put a price on
these benefits – they could involve a
feel good factor such as helping the
local community or charities, or have an
environmental impact such as reducing
carbon emissions.
P2B lending allows investors to vet
investment opportunities and gives
them insight into the business, the
people behind it and just what they
plan to do with the money. This can
create a personal attachment to the
investment and mean that it is much
more interesting to the investor than
putting the money in mainstream
opportunities. Investors can choose to
lend to a company based on more than
just financial returns or stability. They
may want to aid the local community,
help individual companies they have a
prior connection with or fund activities
they have a personal interest in. P2B
can make lending far more exciting
and investors can see first-hand the
difference their money has made.
Another benefit here is that investors can
screen investment opportunities based
upon their personal preferences, morals
or beliefs. They may choose to lend only
to carbon neutral companies, companies
that don’t test on animals or companies
in a specific geographic location. The list
could be endless.
P2B lending is a far more diverse and
exciting investment sector than the
initial headline returns and opportunities
suggest.
RISK RATING AND RETURNS
P2B lending offers a wide range of
risks and returns for investors, which
should be clear and easy to understand.
However different platforms use
different assessment criteria when
approving loans, which can make it
hard to assess risks across a number
of platforms and investment offerings
unless the platform offers long-term data
on defaults, losses after any recoveries
and the effect of any platform fees.
Lending platforms will assess
opportunities based on a number
of different criteria and then apply a
risk rating based upon the perceived
level of risk that the borrower will
default and not pay back the loan.
Risk ratings commonly range from A+
to C-, or very low-risk to high or very
high-risk – this aims to provide some
continuity with mainstream investment
products, but the risk ratings applied
do not necessarily match-up between
platforms or indeed to the actual default
rates experienced on a platform. It
is important to note also that some
platforms price lender rates of return to
lender demand. Funding Circle does this
through a mechanism called a ‘reverse
auction’ where strong demand for a
loan drives down the return for lenders.
There is the risk with reverse auctions
that interest rates payable to lenders fall
below an appropriate level for the risk
attached to the loan. Some platforms
use fixed rate auctions which aim to
price the loan to the risk involved, so
that lenders without as much experience
of business lending can lend within the
parameters set within the P2B platform’s
credit policy. This is the mechanism used
by Assetz Capital for example. Other
platforms price returns to lenders at a
much reduced rate compared to the
borrower rate, but use some of the profit
margin to fund a provision fund that is
anticipated to cover the risk of defaults
and missed payments. These returns
could potentially be below the rate of
return appropriate for the level of risk
involved, although the provision fund
aims to provide security for this risk.
The following table is based on a cross
section of the different risk ratings and
returns available in the P2B lending
market. This includes the different risk
ratings used, risk levels available, returns
on offer and predicted bad debts.
RISK RATING
RISK LEVEL
GROSS RETURNS
(PER YEAR)
BAD DEBTS
A+
Very Low
5-7%
1.2%
A
Low
7-9%
2.5%
B
Medium
9-11%
4%
C
Medium/High
11-13%
5.5%
C-
High
13-15%
8%
SOURCE:
Assetz Capital, Funding Circle, Lend Invest, Wellesley And Co., ThinCats, Funding Empire, and Relendex
