Retrenchment of major banks from small business lending, combined with terrible yields for even sophisticated savers, provided ideal conditions for ‘peer-to-business’ lending to take root in the UK. The ‘peer-to-business’ sector has lent approximately half a billion pounds (£543 million according to AltFi Data) through the various platforms, and the UK now looks like a global leader with Funding Circle moving into the US market.
However, the future has its challenges. On the one hand, the major banks are tentatively regaining their SME lending appetite, coupled with the extraordinarily ambitious entry of challenger banks such as Shawbrook and Aldermore. On the other, the Bank of England is clearly signalling that the days of exceptionally low interest rates are numbered.
Where are the longer-term opportunities for ‘peer-to-business’ lending in the UK?
Unsecured Loans – One of the most defensible areas for ‘peer-to-business’ lending must surely lie in models that leverage investor knowledge (the ‘wisdom of crowds’) to make better lending decisions. I personally wouldn’t lend to a small business at the other end of the country, but I’d happily lend to a local café that I know and like. It’s interesting that Funding Circle is piloting cooperation with local governments such as Camden Borough Council, a sign of things to come?
Asset Finance – Hire purchase and leasing is huge, perhaps half of all non-overdraft business finance facilities. The challenge for ‘peer-to-business’ is simply that asset finance is already relatively well-served due to the plethora of specialist lenders and brokers; that said, even small inroads would be material. There’s also surely room for ‘peer-to-business’ lenders focussed on high-yield asset refinancing analogous to Borro; Funding Secure is an early example.
Commercial Property - Property finance, particularly buy-to-let and new-build, collapsed at the peak of the credit crunch; notably, commercial property was the one market segment where RBS talked openly about a lack of lending appetite. As credible borrowers return, the scale of this lending opportunity is immense, but I’d question whether long and complex property transactions fit a ‘peer-to-business’ model. High yield ‘bridging’ loans are a notable exception, often completing in days, but there’s already no shortage of specialist direct lenders.
Working Capital - The impressive growth of Platform Black and Market Invoice, both with what appear to be excellent loss rates, demonstrates that working capital is a very real opportunity (particularly outside of retail and hospitality, which is already well-served by cash advance providers). The bureaucratic culture and old-fashioned IT of major banks also mean that the appetite for fast small business loans is poorly-served (it’s no surprise Wonga chose this need for their first business finance offering, Everline); I would personally love exposure to those yields.
I’d argue that ‘peer-to-business’ lending will evolve to serve particular poorly-served niches, especially where crowd-based decisions provide an information advantage over faceless banks; the sheer scale of the commercial lending market means that this is an attractive future indeed.