I think it is generally accepted that Alternative Finance and P2P lenders (lets call them Platforms) bring nothing but a huge positive shift in funding opportunities for both business and private individuals. For too long, the UK has had a “cartel” of a small number of banks that have, whether we accept it or not, worked together to control the products they deliver to the market and the pricing and origination standards they require. It is no coincidence that the approval requirements for one bank are the same as the other banks. The Platforms rightly disrupt this in a way that is hugely threatening to the banks. Long may it continue.
So, the developments mentioned above are very healthy if you are a borrower – whether you’re a business or private individual. Unlike a bank, that borrows the money it lends from capital markets, the Platforms obtain their funds to lend from Institutional lenders (Hedge Funds and others), the British Business Bank (Government Bank), and private people searching for a higher interest rate than can be obtained from high street banks and building societies. Whereas the banks borrow the funds to lend and are responsible for the repayment of the money they borrow, the Platforms are not lending their own money but rather that of their depositors or buyers of the loans they originate – including the man in the street.
The banks generally understand risk – credit & repayment risk, sector risk, political risk and many other types of risk. We can grant them that! They appraise risk to ensure they get their money back – not unreasonable.
The Alternative and P2P lenders are lending “your” money, not their own. The issues therefore are: Do you as an Institutional lender or Private person understand the risk issues? Do you understand the lending policies of the Platform? Can you rely upon the Platform to lend safely and prudently? Will YOU get your money back?
There is a hugely mixed bag in terms of quality of Platforms and how they mitigate risk when lending other peoples’ money. Some have a Reserve Fund to cover defaults but many do not. Some lend very carefully and have more than adequate collateral cover to cover their advance. On the other hand some Platforms lend in a very “cavalier way” – why? Because they do not lend their own money. They work on the basis that if 5 or 10 investors (or more) have a small % of each loan, then if it does not get paid back then the losses are spread over a number of investors and they lose not one penny.
This has caused some Platforms to lend in a very incautious way. For example, some Invoice Finance lenders are financing invoices that no professional invoice finance lender would. They are financing invoices that are for goods supplied to any country, sale or return, no personal guarantees from borrower, no contracts with borrower, almost any sector and then they say YOU, who lend the money, are responsible for collections!!
Invoice Finance is very specialized and needs careful and professional appraisal. Platforms that are making term loans to SME’s and private persons generally seem to be risk aware this because they understand credit risk. Invoice Finance is much more than credit risk. It’s about operational risk and performance. Much more care is advised when investing in Invoices.
As an Investor in assets created by Platforms, do YOU have the experience in how to make a risk appraisal? Can you trust the Platform to lend YOUR money safely and correctly? .... I will leave you to decide the answer. If you do not then you need to seek advice from someone who does know the many risks (not only credit risk but many other risks) before you risk your money.