MAJOR peer-to-peer lenders are exiting segments of the business financing market in order to establish themselves as the leading provider in their chosen sector.
RateSetter said last Monday it was exiting the unsecured business loans market so that its commercial finance product suite focuses solely on property-backed and asset-backed lending.
Meanwhile, Funding Circle announced last year that it was winding down its property lending to concentrate on its core business of unsecured lending for small- and medium-sized enterprises (SMEs). It stated that it wanted to be the first port of call for small businesses looking to finance their growth.
Conrad Ford, chief executive of Funding Options, said there is a growing trend of lenders wishing to specialise and become the dominant player in their sector.
“Funding Circle made a foray into property finance and has now formally shut that down,” he said. “It very clearly stated that it was planning to stick to SME unsecured lending and become the global leader in the field.
“I think that’s a very good strategy. What they were fundamentally communicating was you can’t be good at everything – that’s the problem with the banks.”
Ford suggested RateSetter’s decision to concentrate on secured business lending shows it has the same aim of becoming the leader in one specialist area of business financing.
“There are a lot of benefits of being the dominant player. You get far more data, acquisition resources and market awareness – all those assets work in your favour,” he said.
However, MarketInvoice bucked the trend and entered the unsecured business lending market in November. It means the platform now offers unsecured business loans in addition to invoice finance.
Jordan Sanderson, business loans lead at MarketInvoice, said unsecured business loans are the perfect fit for businesses that are not quite invoice finance-ready.
He said business loans could serve as a working capital solution and a feeder to invoice finance.
“The market is a lot larger for unsecured lending (relative to invoice finance) and there is scope to bring our expertise – an easy-to-use platform backed by expert customer service – to more SMEs,” he added.
Read more: RateSetter targets growth in SME lending
Unsecured loans are riskier than secured loans because there is a far smaller chance of the lender getting their money back if the borrower defaults. As a result, unsecured lending tends to offer higher rates.
Neil Faulkner, co-founder of 4th Way, said an advantage of unsecured lending is investors can get lots of data more quickly because the loans tend to be shorter and processed faster.
“Unsecured lending tells you the big picture early because you know that if a loan defaults you won’t recover much,” he said. “Secured lending tends to be lower risk but there is more for investors to understand. The loans are bigger but they are few and far between so the data is not as useful. It’s better for investors to understand the people and processes behind it.”
Even though an investor is likely to get their money back through secured lending, there is a big time lag. Faulkner said it can take years in some cases.
Read more: Government urged to create ISA aimed at SMEs
Investors in secured lending also need to be careful about concentration risk.
“The loans are very large, so an investor’s money could be in a big loan with not enough diversification,” said Faulkner.
Funding Options’ Ford said the difference between unsecured and secured lending tends to be blurred. For example, within unsecured lending a large proportion is secured by personal guarantees.
“People use binary terms but, in reality, when people talk about secured business lending they mean it is secured on something within the business, whereas unsecured lending is often secured on something outside of the business,” he explained.