John Mould, chief executive of ThinCats, explains the importance of filling the business funding advice gap
ARE WE IN THE MIDDLE of an advice crisis? According to John Mould, chief executive of ThinCats, the rise of online banking and the availability of alternative finance has created a profound shift in the way that businesses seek out and receive advice. This is creating an ‘advice gap’ – but it is a gap that peer-to-peer lenders and other finance providers are ready to fill.
“Historically when business owners wanted to borrow, they would go and see their bank manager,” says Mould. “There would be some wizened person who would give them some advice – ‘I know you think you should borrow more, but I don’t think you should. You will be stretching yourself too much’. But as banks become more computer based, there’s no-one helping people to make these decisions.”
This means that small- and medium-sized enterprises (SMEs) across the UK risk going into new funding agreements without having all the information at hand. As Mould says: “If you’re looking to borrow a couple of million pounds, you need someone to bounce the ideas off!”
“We, as a lender will always make sure the person can afford the loan that they are applying for,” Mould adds. “Because businesses are now leaving the banks and looking to lenders like us, our role is not only to fill the funding gap but actually to fill the advice gap as well.”
ThinCats uses a network of qualified introducers to source its loans, complemented by its own internal processes as well. For example, it uses its proprietary Propensity and Risk Model (PRISM) software to benchmark more than 400,000 medium-sized UK business across a number of metrics, including insolvency risk. This information is shared with accountants and brokers, as well as the businesses themselves – the benchmark can tell them where they sit in the market, and how they stack up against their competitors.
“The banks have lots of this data, but because they are not interested in mid-sized businesses, they have not invested in how to interpret it as accurately as we have,” says Mould. “So we can actually offer more useful information to an SME than a bank could. And with the advent of Open Banking, we’re going to be able to provide even more useful insights.”
When ThinCats’ credit analysts look at an SME loan, they ask a series of questions: What are you borrowing for? What is the loan going to do for your business? Will you be able to afford the interest or capital repayments and have money left over so you don’t put your company in stress?
“We absolutely believe that when we lend money, we need to be certain that these businesses are borrowing money responsibly and that they know what they are doing and why they are doing it,” says Mould. “That’s really key for me.”
In fact, Mould believes that this is such an essential part of the lending process that it won’t be too long before the regulator will insist that SMEs of a certain size will have to do their own affordability tests. As alternative business lending becomes more and more popular, and Open Banking creates a new expectation for transparency, a growing community of advisers coupled with better data will be key to closing the advice gap.
This article featured in the September issue of Peer2Peer Finance News, available to read online.