Peer to Business Lending
Alternative Finance Sector Report - November 2014
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PEER TO BUSINESS LENDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
November 14
AUTHOR
Luke Jackson
Samantha Goins
DUE DILIGENCE
Platforms undertake varying degrees
of due diligence. Some may only
undertake basic credit checks on
primary individuals, whilst others will
undertake a full financial audit, site
visit and detailed background checks.
Ultimately the decision of whether to
invest lies with the investor, and they
must satisfy themselves with the risks of
any investment before parting with their
money.
As part of the basic due diligence
process, all borrowers and lenders are
identity checked automatically during the
online registration process. For anyone
investing over £10,000 in one year
they will have to adhere to anti-money
laundering (AML) checks including proof
of address and certified ID.
Borrowers are credit checked in far
more detail than lenders, with external
agencies used to minimise fraud and
reduce the risk of default. The due
diligence can include financial analysis
on the company or predicted use of
funds, and a review of previous accounts
to build a picture of the financial health
of the company. This will also include
background checks on all directors
and shareholders of the borrower. This
information, along with the credit score,
allow the platform to assign a risk rating
to the borrower, usually from A+ (Very
low risk) to C- (high risk).
Some platforms will classify certain
borrowers, particularly start-up’s,
differently, and give them an ‘N’ (New
business) rating. Most of these borrowers
will not be able to evidence operational
history or accounts for a risk rating to
be calculated on. Instead, due diligence
will be based on the individuals behind
the business, including the success
of previous companies they have
been involved with and whether their
knowledge and experience is applicable
to the new business or venture.
Lenders are putting their faith in the
platforms due diligence process and
ability to correctly score borrowers
based on their risk rating criteria. But
at the end of the day investors must
undertake extra due diligence where
possible to independently verify the
checks undertaken by the platform if they
are going to fully satisfy themselves with
the risks.
THE SECONDARY MARKET
The secondary market allows lenders
to offer part or all of an existing loan for
sale to a new lender. This aims to create
liquidity in the market and allow lenders
to exit their investments at any time.
Lenders can sell their loan on to someone
else should they require the capital back
before the normal date for the repayment
of the loan. This also allows new lenders
to purchase loans that have been
performing well with borrowers that
have proven they can meet repayments.
Investors can purchase loans through
the secondary market without having
to go through a bid or auction process,
meaning that interest will accrue from the
day the investment is made.
MARKET UPDATE
The dominance of consumer credit and
savings in the UK by high-street banks
and investment by a small number of
financial services firms has led to a lack
of competition and innovation in the
marketplace. New ideas are needed to
help the market evolve and encourage
innovation to benefit consumers - P2P
lending has the potential to drive this
change. Platforms have seen exceptional
growth in recent years and their impact
is becoming more noticeable as they
provide more and more capital to UK
individuals and businesses.
Reasons consumer lending is ready for
disruption:
1.
Since the 2008 credit crunch, banks’
compliance costs have rocketed.
Increased capital holding requirements
have meant that they have less money
available to lend, increasing the need for
alternative lenders.
2.
Maintaining a high street presence
increases costs for retail banks but not
for internet-based lenders.
3.
Investors, such as SIPP holders, are
hungry for higher yields over shorter
periods of time.
4.
New data sources present
opportunities for better underwriting.
5.
Few, if any, current banking customers
feel loyalty to their bank or existing
lender.
SMES
Looking specifically at the SME market,
the Bank of England launched Trends
in Lending in April 2009 to present
the Bank’s assessment of the latest
developments in lending to the UK
economy. The latest information from the
Bank of England was released in April
2014. The stock of lending to SMEs fell in
the three months to February compared
to the previous quarter. The major UK
lenders of Banco Santander, Barclays,
HSBC, Lloyds Banking Group, Nationwide
and Royal Bank of Scotland accounted
for around 70% of lending to businesses.
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Net lending (gross lending less
repayments) to SMEs was close to zero
in Q4 2013, having been negative during
the same quarter a year earlier (Gross
And Net Lending To UK Non Financial
Businesses Chart).
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