Peer to Business Lending
Alternative Finance Sector Report - November 2014
20
PEER TO BUSINESS LENDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
November 14
AUTHOR
Luke Jackson
Samantha Goins
LENDING TO SMES VS. PROPERTY DEVELOPERS
P2B platforms offer investors the opportunity to lend to small or medium sized businesses with proven cash flow and some
also allow lending to property developers to help fund construction projects. Property developers must generally be able to
evidence a track record of building and selling previous projects in order for their loans to be accepted onto a P2B platform.
These two different opportunities present various risks and benefits to investors, such as varying loan durations and returns
depending on the risk being undertaken by the lender.
SMES
As previously discussed, the vast majority of P2B lending is made to reasonably established businesses with proven cash flow,
in order to fund expansion or new ideas. Loans are either secured against the assets of the business or a first charge against
property, or in some cases guaranteed by a director. The loan should be considered relatively secure if it is fully physically
backed or to a company with a proven record of repayments. Loans tend to range from 1-5 years and depending on the
risk, will pay reasonably strong returns. Loans at the lower end of the risk scale could include the refinancing of old loans
or funding the purchase of new equipment, whereas higher risk loans may be to fund aggressive growth, the acquisition of
another company or the implementation of new ideas into the company.
PROPERTY DEVELOPERS
The key is the quality of the borrower. Most property development projects are held within a single special purpose vehicle
(SPV). This means that all aspects of the build can be held within one single legal entity. The SPV can buy the property,
contract with builders and other service providers and maintain its own bank account. Cash is paid into the SPV to finance the
property purchase, professionals’ fees, project costs and interest.
No cash is generated on a property development project until the date of exit (normally the sale of the underlying property)
meaning that interest cannot normally be paid on these types of loans until the loan is repaid in full with interest on the sale
of the property or upon its refinancing by the developer with another lender. In some circumstances the property may remain
tenanted while planning is obtained for example, which means rental income can be used to pay interest on the loan. But
often once the project commences the property will not usually produce any income.
The SPV is the borrower, but the risk and due diligence will often focus on the principals behind the project: often the
shareholder or director of the SPV, or the developer. The principals will usually provide a personal guarantee, which could
be secured on personal assets or property. The loan will also be secured by legal and floating charges over the property and
other assets owned by the SPV itself – often the property or land being developed.
BENEFITS
Range of risk/return options
Lending to established businesses
Large number of platforms offer this
Information on the borrowers is often easy to assess
Usually asset backed or low risk of default
Returns paid monthly, quarterly or annually
Returns often include capital and interest
RISKS
Borrowers can be susceptible to economic changes
Longer-term loans could be impacted by interest
rate rises
