Peer-to-Peer Lending: The Future of Finance?

Thousands of well-run and profitable businesses are struggling to get the money they need to invest, grow and employ more staff. This is seriously damaging the UK’s hopes for economic recovery.

The choking off of lending, following the credit crunch, has caused many businesses to be suspicious of banks. This distrust has been compounded by poor service, archaic lending rules and a string of financial scandals that have led to a loss of trust.

We are seeing an increasing amount of small and medium-sized enterprises (SMEs) now choosing to look at alternative lending sources from leasing and asset finance, to the relatively new peer-to-peer lending industry.

In particular, SMEs peer-to-peer lending is doubling in size year-on-year and for those seeking secured loans below £500,000 the banks are simply not competing.

Peer-to-peer lending is simply the ability for investors to lend money directly to businesses without going through the traditional sources, such as a bank.

The number of new peer-to-peer lenders seems to grow week-by-week and all have a slightly different business model.

In the main they offer secured loans ranging from six months to five years, on amounts from £50,000 upwards; many with no early repayment penalties. From my experience with Aedesia, loans can often be drawn down in periods from as little as two to four weeks from start to finish.

Lenders are often entrepreneurs or successful business people who understand how to run a business and often have a greater knowledge and awareness of risks and rewards than their local bank manager.

The basic canons of lending don’t change, being serviceability and security; but lenders who have run their own business are perhaps better able to judge the character and ability of a management team to deliver a return with a minimum of risk. These investors will invest across a diversified portfolio of SMEs as some will inevitably fail. 

There are perhaps two big concerns for the peer-to-peer industry and the first is the nature of the investors themselves.

Some platforms allow investors in for as little as £20. They see an investment opportunity and rush almost lemming like into the deal without taking the time to even read the proposal. These investors will often be the most vocal if the loan fails to perform, for whatever reason. You can imagine the difficulty of even a simple £50,000 loan which could have a syndicate of 1,000 investors. Communication and decision-making can be very time consuming.

The second is the lack of a clear recovery policy on many of the new platforms.  Understanding why a loan is not performing is key to deciding what approach is needed and hopefully to get it back on track. It is critical that the situation is dealt with quickly and efficiently, otherwise this can prejudice the recovery of the lender’s security.

When a business gets into difficulty the interests of the directors can often diverge from the interests of the lender. In any decision to lend you need to ask what the recovery process actually is and who is likely to be carrying it out.

At Aedesia, we deal with this by qualifying both our investors and borrowers, who in the main are clients of our own accountancy network. Investors are kept to small manageable groups starting at £10,000 minimum for smaller loans, to £25,000 minimum for loans of £200,000 and above.

The loans are rigorously vetted in conjunction with our accountant introducer and a recovery process is established right at the outset, with security and personal guarantees to suit the size and nature of the loan.

These issues will become more relevant as the Government is about to allow pensions to be invested in peer-to-peer platforms. Investors will be very wary of platforms that do not have a clear and unequivocal policy for dealing with non-performing loans. Access to good quality, sensibly priced recovery and insolvency professionals is crucial in these circumstances to ensure an effective and efficient recovery of lenders’ money.

As to the future of peer-to-peer lending, it’s here to stay and may well become mainstream if the banks fail to wake up and smell the coffee.

There is no reason why both cannot work together and indeed at Aedesia we see a number of introductions from mainstream banks that are happy to provide the lifeline SMEs need to achieve their potential.

I am informed that there is some £1 trillion sitting in individual bank accounts earning a pittance in interest. This may well represent the peer-to-peer lenders of tomorrow who can invest in a UK business portfolio at decent rates of interest and good security. Watch this space.