Government support has created a distorted peer-to-peer business lending market. Michael Lloyd investigates…
When chancellor Rishi Sunak unveiled the coronavirus business interruption loan scheme (CBILS) – the lifeline of government support for small- and medium-sized enterprises (SMEs) – he could not have foreseen its unintended consequences for the UK’s lending community.
The 80 per cent government-backed loan scheme was welcomed by struggling businesses, who were able to apply for loans of between £50,001 and £5m to help ride out Covid uncertainty.
However, this scheme has also resulted in a distorted marketplace, whereby business lenders accredited to deliver the scheme have an advantage over those that are not.
This is especially evident in the peer-to-peer lending sector, which contains many small business lenders. Only four of them – Funding Circle, Assetz Capital, Folk2Folk and LendingCrowd – have been accredited to participate in the scheme.
In April, Funding Circle became the first P2P lending platform to be accredited to CBILS, offering loans up to £500,000 with rates from 1.8 per cent APR. It is also the only P2P lender to be approved for the bounce back loan scheme (BBLS), which comes with a 100 per cent government guarantee and provides loans of up to £50,000.
For SME borrowers, CBILS and BBLS are the ideal solution – widely available, and with extremely competitive rates. But for SME-focused P2P lending platforms which do not have CBILS accreditation, it is a different story. Two months before it won CBILS approval, LendingCrowd complained that CBILS and BBLS had played a part in a decline in new borrowers on its platform during the pandemic.
Meanwhile, P2P business lender Rebuildingsociety has been vocal on the disruption caused by the government emergency loan schemes.
In May, the platform said it had seen a few firms pull out of raising finance through the lender because they were able to receive a BBLS loan instead.
“It’s annoying that we don’t have access to these other schemes but there’s not a lot we can do about it, we just have to get on with things,” says Rebuildingsociety’s founder and managing director Daniel Rajkumar.
“I’m hoping there will be some other initiatives that can be made available to non-bank lenders.”
And these concerns extend to the P2P investor base as well. Nicola Horlick, chief executive of Money&Co, says that true P2P lending, funded by retail investors only, was not profitable for platforms prior to the pandemic and is going to be increasingly difficult now given the number of low-cost, government-backed loans that have been granted to SMEs.
“I think alternative lenders will be pushed out of the market for a period of time because all the good quality companies received government-backed loans, which undermines the whole premise of P2P lending platforms focused on SMEs,” she says.
“So, for the time being it’s better to avoid those types of loans.”
To some industry stakeholders, it seems as though government support is leaving certain P2P lenders at a disadvantage, and there is a concern that the gap between CBILS and non-CBILS lenders could widen.
Lee Birkett, founder of JustUs, says platforms conducting unsecured SME lending will simply not be able to compete with the government guarantees.
“It was bad for these lenders preCovid-19,” he says. “If they were working on a five per cent loss, they are probably working on a 15 to 20 per cent loss now.”
Of course, it was vital that the government prioritised deploying finance to struggling businesses to rescue them from coronavirus-induced cashflow challenges, and some industry onlookers have argued that any market instability caused by the schemes will only be temporary.
“Government intervention does distort the market, it’s inevitable, but it’s what had to be done with Covid-19,” says Mark Turner, managing director, regulatory consulting at Duff & Phelps.
“As the economy goes back to normal, you’d expect government interventions to be gradually withdrawn. Then, lenders will return to operating without them and I wouldn’t expect the gap between CBILS and non-CBILS P2P lenders to widen.”
Non-CBILS accredited P2P lenders have been forced to adapt not just to Covid-19, but to the increased competition of government guarantees and subsidised interest rates on CBILS and BBLS. As a result, Rebuildingsociety has focused on other areas of its business, such as compliance and onboarding more appointed representatives.
“That part of the business is still growing and developing,” Rajkumar says. “So, we’re able to keep trading even though it’s difficult to do new lending.”
Horlick says that Money&Co had already opted to lend on a secured basis and with caution prior to the pandemic, due to concerns of a Brexit-induced economic downturn. It has recently pivoted to operate in the niche areas of music loans and litigation finance.
She says there are opportunities for alternative lenders with multiple funding lines while retail P2P lending has a bleak future.
“Covid-19 could be the last nail in the coffin for retail P2P lending, although I think that property lending still has a future,” Horlick comments. “But there are opportunities for alternative lending businesses – there are interesting pockets where you can make money.”
There is also an opportunity for non-CBILS accredited P2P lenders to support the businesses left behind by CBILS.
P2P lenders have a deep understanding of the markets and risks involved in these sectors, and government statistics show that approximately half of all CBILS and around 20 per cent of BBLS applications are unsuccessful.
That still leaves a lot of SMEs in need of funding. Birkett aims to support these firms with his very own Small Business Interruption Loan Service (SBILS).
“I think too much has been made of CBILS,” he says. “It was basically a rescue fund, only meant to be short-term. We didn’t want to participate in it because you have to take the first loss and it’s not profitable.
“The government has exhausted its initial bounce back and CBILS channels and with SBILS we’re a regulated fintech pipeline for the distribution of much needed liquidity.”
Birkett says once CBILS ends he expects JustUs to return to normality because of record levels of borrower demand.
“Business P2P lending is rocky but I’m cautiously optimistic for secured lending against property,” he adds.
At the time of going to press, Chancellor Rishi Sunak was rumoured to be extending four of the government’s emergency funding schemes, including CBILS. There have also been calls for the government to convert loans into equity, while think tank Onward has recommended the government give businesses longer to repay its support loans through a surcharge on taxable profits and shareholder salaries.
Despite all the speculation, the consensus among the alternative lending community is that P2P should and could play a greater role in supporting businesses during a possible second wave of Covid-19.
“There’s a potential of a second wave and businesses will be struggling with the furlough scheme ending,” says Charlotte Crosswell, chief executive of fintech trade body Innovate Finance.
“This is where the non-bank and P2P lending sector can play the role of meeting that demand.”
Neither Folk2Folk nor Assetz Capital have changed their risk mitigation and recoveries processes as a result of the government guarantees and both platforms are confident about their future once the government support ends.
Folk2Folk plans to continue as usual post Covid-19, and the platform claims that it has retained a strong customer base by acting fairly and welcoming both existing and new borrowers and lenders during the pandemic.
“We continued with business as usual,” says Roy Warren, managing director of Folk2Folk. “And we didn’t take advantage of the situation by making our terms of business more favourable to us.”
Meanwhile, Assetz Capital expects to achieve stronger growth in 2021 than in 2019. Chief executive Stuart Law forecasts a substantial drop in bank lending next year, following 13-year highs in 2020, according to a forecast from the EY Item Club, and says this presents an opportunity for alternative finance to fill that gap.
“We’re expecting a big year next year,” he says. “There are plenty of things to work through to get there but we have a plan.”
One thing we know is that the government-backed loan schemes will eventually come to an end, and any related marketplace distortion will therefore only be temporary. As the economy recovers, normal market conditions should return.
But in the meantime, non-CBILS accredited P2P lenders have been forced to adapt to the new normal, seeking opportunities amidst the crisis to support those businesses that have missed out on government support.
There is only speculation as to what will happen once the state loan schemes end, but hopefully the gap in the market between accredited and non-accredited P2P lenders will narrow.
“Only a small number of platforms were accredited to participate in CBILS,” says Frank Wessely, managing director of business advisory firm Quantuma.
“The CBILS-accredited platforms that are robust will be trusted as part of this type of government institute in future if they decide to provide similar support again, and if this happens I hope the chancellor takes that trust on board and opens the opportunity more widely to the sector.”
CBILS may therefore even benefit the whole P2P sector, but for now, non-CBILS accredited P2P lenders must continue adapting to the new normal until the economy recovers.