Defining a constantly evolving and rapidly expanding sector such as Alternative Finance is always not an easy challenge. There are almost daily innovations as Platforms seek to carve out new niches and come up with new ways of financing. Alternative Finance means different things to different people.
The Liberum AltFi Volume Index, The Index, is designed to capture peer to peer financing. This can be divided up into 3 separate sectors: Peer to Peer Lending; Equity Crowdfunding and Online Invoice Financing.
All of these forms of financing have one thing in common:
- Financing is arranged through a Platform.
- Those providing capital face the end receiver of the capital directly.
- The vast majority of business occurs online.
The Platform is therefore the facilitator or intermediary. Other characteristics that are often, but not always, present in these Platforms include:
The financing is social – the Platform facilitates some kind of financial exchange between people – whether that be between two individuals or one project and many providers of capital.
- A dynamic marketplace is present where investments may be selected and/or lending rates set.
Platforms are not banks.
Peer to Peer Lending
Peer-to-peer lending (P2P) is the process by which investors lend money online, usually to individuals or to SMEs.
Peer-to-peer platforms generally, but not always, feature some form of dynamic, rate-setting marketplace. Each Platform has a subtlety different mechanism by which this takes place. From the Funding Circle style online arena, where the cost of borrowing for a business/individual is driven down by various lenders auctioning to participate in a loan, through, the RateSetter mechanism, where a singular desired rate is initially specified by borrowers and lenders – with the platform then automatically matching appropriate users together to a platform such as Zopa or ThinCats where the interest rate for a particular loan is fixed, determined by the platform prior to the loan being offered to investors.
Some Platforms specialize in secured lending such as Assetz Capital, LendInvest and Wellesley and Co.
Loans can be either amortizing or feature a bullet repayment.
Online Invoice Financing
Online Invoice Financing, sometimes called invoice trading, is a much more flexible, online version of debt factoring. Businesses can selectively sell individual, unpaid invoices online in exchange for the majority of their value in immediate cash.
The invoice purchaser, or financier, will have a set amount of time over which to receive payment for the full value of the invoice. It remains the seller of the invoice’s responsibility to chase and retrieve the debt on behalf of the invoice financier. If that purchaser does not receive payment-in-full from the debtor in the allotted time period, it falls to the seller to reclaim the invoice, and refund the financier.
As with Crowdfunding and Peer-to-Peer Lending, Invoice Finance Platforms feature a marketplace of some sort allowing investors to choose individual invoices to finance.
Equity Crowdfunding democratizes the process of Equity raising for businesses and projects. Through the use of highly sophisticated online platforms, ordinary people and experienced investors alike can support the projects they believe in by purchasing equity in the company or project.
The company/project seeking to raise equity normally determines the price at which they would like to sell a certain percentage of their equity.
Financing startups is the most popularized version of Equity Crowdfunding – but in truth this fundraising model is very flexible and platforms also cater to the needs of existing companies.
Crowdfunding Platforms also exist that that are donation-based and rewards-based. These offer no financial return and are not included in The Index.
NB some CrowdFunding Platforms, such as Seedrs, create Special Purpose Vehicles (SPVs) that are wholly owned by the equity funders. This shell company in turn owns shares in the company that raised the equity. Strictly, therefore, this does not conform to the definition of Equity Crowdfunding above (capital providers facing end capital users directly), however, as the SPV is 100% owned by equity funders, it can effectively still be treated as peer to peer.
P2PFA definitions of Non-Performing Loans and Defaults
Definition of Non-Performing Loan
A loan should be considered to be a ’Non-Performing Loan', 'Impaired' or in ‘Arrears’, where the relevant borrower of the loan is:
(a) more than 45 days overdue in an interest payment; or
(b) more than 45 days overdue with a principal repayment; or
(c) legal action for enforcement of the loan has commenced; or
(d) the loan is being or has been renegotiated with a borrower, or
(e) the loan has not otherwise been in full compliance.
The amount of arrears is the amount overdue for payment in a) and b) above.
Definition of Capital Losses (Default)
A capital loss should include:
(a) any portion of a loan that has not been repaid, 120 days following the original loan repayment date;
(b) all costs incurred by the lender in relation to the enforcement of a Non-Performing Loan, where such costs are not recovered in full from the relevant borrower;
(c) any loan amount where there is a reasonable expectation that the borrower is not going to repay the loan on the original loan repayment date (ie the borrower has gone bankrupt etc).
To be reported on a 12 monthly calendar basis (Jan to Dec)
Actual arrears as a percentage of the total current loan book; and
Expected default rate percentage; and
Actual default as a percentage of the total lent by the platform since inception.