Luke Jackson
Samantha Goins
Peer to Business Lending
Alternative Finance Sector Report - November 2014
40
PEER TO BUSINESS LENDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
November 14
AUTHOR
SUMMARY AND
CONCLUSIONS
Mainstream banks have had a
stranglehold on small business lending
for years. That stranglehold is now being
broken by the advent of alternative
finance platforms and peer to business
lending. This is a significant change,
perhaps as significant as the changes
we have seen in the book and music
publishing industries in the last two
decades. Consumers now have another
option when it comes to deciding where
to deposit spare cash.
If they choose to go down the peer to
business lending route, they will sacrifice
some liquidity, the protection of the
bank standing behind the loan book
and the ultimate insurance of the FSCS.
However, in exchange they will receive
much higher yields. This is the heart of
the matter for retail investors – does this
trade off make sense for them?
It does for a few at the moment, and
their numbers are likely to increase.
Regulation has brought improved
credibility with it. Network effects of
social media are spreading the word and
making alternative finance investment
appear an increasingly normal thing to
do. Inclusion in SIPPs and ISAs will boost
yields further. Disenchantment with the
performance of traditional banks has
created an appetite for alternatives. And
the more people who invest, the deeper,
more liquid and more robust the market
becomes.
The fact that significant amounts of
institutional money are about to be
invested in peer to peer and peer to
business lending is a strong indicator
of just how good the opportunities
available are in this sector.
There are risks, and there will be speed
bumps on the road. Institutional money
may crowd out retail investors and
deny them access to the best deals.
Platforms who rush to market may make
bad lending decisions. Consumers may
mis-price risk and take on more than
is appropriate for them. A platform
failure could taint the whole market,
and an unexpectedly high number of
defaults in a recession might show that
contingency funds or collateral for loans
are inadequate. But on the whole it is
likely that consumers will note these
risks and then go ahead anyway – the
yields on offer are attractive enough
to compensate for these potential
downsides, and a savvy investor can
minimise their exposure to them anyway.
This is perhaps where advisers come in.
If they have clients who are interested in
investing in this asset class, advisers can
use their knowledge and experience to
secure the highest yields for the lowest
amount of risk for their clients, providing
a new, exciting, engaging and high
yielding part of some of their client’s
portfolios.
P2B Lending can include lending
to businesses (SMEs) and lending to
property developers
Risk and return varies from project to
project and business to business
Previously the SME asset class was
only accessible by banks – savers had
an indirect exposure to it through
their deposit accounts, they did not
get the full benefit (returns were much
lower), but they were not exposed to
the full risk either (the bank managed
the loan book and provided the bank
was ok, there was no problem for
depositors)
Alt Fi platforms opportunities have
changed this dynamic opening up
investment in SME lending to many
more people
Property projects have been more
common as retail investments,
but typically had very high minimum
investment levels - Alt Fi platforms
have changed this
Investors must be mindful of the risks
though…
