The British Business Bank (BBB) has predicted more peer-to-peer lenders could be acquired or merged during 2021 as they adapt to the fallout of the pandemic.
Its latest small business finance markets report predicted lending among marketplace lenders had declined last year for the first time.
The BBB said lenders providing emergency finance such as the coronavirus business interruption loan scheme (CBILS) had taken some of the demand away from P2P lenders.
Meanwhile, those alternative finance providers that have been accredited for the scheme, such as Funding Circle and Assetz Capital, are only allowed to use institutional funding to finance the government-backed loans, rather than retail money.
“After the onset of Covid-19, demand for non-government guaranteed unsecured small business loans plummeted as first CBILS and then bounce back loan scheme lending attracted those who may have otherwise turned to marketplace lenders for finance,” the BBB report said.
“As a result, several marketplace lenders reported deal flow drying up while some chose to stop writing new business, at least for a few months, and concentrate on supporting their existing customers.”
The BBB also said getting accredited for government schemes was a challenge for marketplace lenders.
It said the most challenging issues for marketplace lenders were attracting funds while meeting pricing limits and structuring their institutional investors’ funding agreements to meet the legal requirements for the government guarantees.
“For non-bank lenders who have managed to lend via the government Covid-19 schemes it has required them to put forward proposals designed to give their investors comfort that their funding would benefit from the guarantee,” the BBB said.
“Given marketplace lending involves originating the loan but not using the originators’ own funds to finance the loan, this posed a significant and unique challenge for the industry and has resulted in different lending models, including on balance sheet lending.”
The BBB said the pandemic has shifted the trend towards institutional funding and cited Metro Bank’s acquisition of RateSetter as an example of how the sector is changing.
It predicted more partnerships, acquisitions and mergers, suggesting Starling Bank could be interested in platforms within the alternative lending sector.
“2021 is likely to see further partnerships, mergers or acquisitions as finance providers come to terms with the fallout of Covid-19,” the BBB said.
“One potential buyer is Starling Bank. In a recent interview Anne Boden, chief executive of Starling, suggested they were actively on the lookout for a lending business to buy with Europe’s non-bank lenders, including marketplace lenders, potential targets.
The report showed that record numbers of businesses sought financial support amid the pandemic last year and the numbers could rise during 2021.
Perhaps unsurprisingly given the pandemic and lockdown restrictions for much of last year, 45 per cent of SMEs surveyed said they applied for external financial support in 2020, compared with 13 per cent during 2019.
At the same time, gross bank lending to smaller businesses rose to £104bn in 2020, 82 per cent higher than in 2019, driven by use of the government loan schemes, the BBB said.
The report revealed that 89 per cent of businesses seeking external financial support in the past year did so because of the impact of Covid-19, with 75 per cent of these SMEs seeking cashflow support.
It also suggests there could be significant further demand for funding throughout 2021 as businesses seek to recover from the pandemic, adapt to Brexit, improve productivity and transition to a new net zero economy.
“This has been an especially challenging period for smaller businesses with external finance playing a vital role in business survival in the face of the Covid-19 pandemic,” Catherine Lewis La Torre, chief executive of the BBB, said.
“The British Business Bank has played an important role during the crisis and we will continue to support smaller businesses as they steer a path towards a sustainable recovery.”