The distortion of the business lending market is coming to an end and P2P platforms are adapting to the next stage. Michael Lloyd reports…
Peer-to-peer business lending platforms are enjoying a transition to ‘the new normal’ after operating in a distorted market last year.
The government introduced a number of Covid-19 loan schemes which were a lifeline for struggling businesses. However, those lenders which were not accredited to offer government-backed loans found it difficult to compete, creating a ‘two tier’ P2P business lending market.
Furthermore, mandatory forbearance measures to support businesses meant that default rates were near zero for many platforms, which was unlikely to be representative of the health of the UK’s small- and medium-sized enterprises (SMEs) when the measures ended.
The good news is that the typically agile P2P sector has adapted to the pandemic and is continuing to adjust as we come out of the other side.
“On the whole I think we are looking at a positive future for P2P – it’s been a tough year, but we are seeing a lot more opportunities coming through,” says Ian Anderson, chief operating officer of ArchOver.
Most platforms have tightened their lending criteria and some are avoiding lending to firms in sectors most affected by the pandemic. Peer2Peer Finance News has learnt that platforms look set to keep these changes in place for the foreseeable future.
Lee Birkett, chief executive and founder of JustUs, says platforms had to enhance their due diligence to ensure they do not lend to hospitality firms. He expects this policy to continue despite the lifting of lockdown restrictions, as the sector has still only reached a fraction of its pre-pandemic customer numbers in some areas.
Read more: Home improvement loans rose during lockdown
“There’s still a very conservative approach to lending,” he says.
“It’s certainly not at the appetite it was pre-coronavirus and if anyone is they need sacking!”
Daniel Rajkumar, managing director of Rebuildingsociety, reveals a similar approach to protect his platform during the pandemic.
Rajkumar says that the P2P business lender ensured it worked with businesses that would trade through the Covid-19 crisis, such as convenience stores, rather than those unable to do so like tourist attractions.
The platform has issued a Covid-specific survey of questions to its borrowers to help understand how their businesses are coping.
“I think we’ll review the survey in our next credit review meeting due quite soon and businesses will be able to answer questions more favourably,” says Rajkumar.
“We have received an uptick in enquiries, but few are meeting the criteria.”
David Bradley-Ward, chief executive of Ablrate, similarly says that his platform has tightened its criteria, explaining that it is not lending to any more pubs.
He predicts that business lending will return to normal but notes that Covid-19 has set the precedent for future lockdowns.
“If you’re lending and not taking into account the possibility of a partial shutdown then you’re not factoring in everything,” he says.
“Before this I wouldn’t have thought about being shut down for six months to a year, but a precedent has been set now.”
Armed with tighter lending criteria and a recovering economy, platforms should be well placed to take on the inevitable rise in defaults as furlough, tax deferment and the moratorium on rents are tapered off.
“Lenders which have sufficiently diversified can still confidently expect to keep making a profit, but lending results will tick down and be less impressive,” says Neil Faulkner, managing director and head of research at 4thWay.
“With a more stable economy, businesses will have had time to recover and will see customers spending money. Bad debts will be higher than the long-run average for a while, but still profitable for investors.”
However, Bradley-Ward warns that some of the less innovative platforms could face trouble.
“There are some fantastic platforms out there doing brilliant things, raising money for great ideas and to scale and that’s fantastic,” he says.
Read more: Shojin unveils expansion plans
“But some are doing the same thing and not really improving, raising money year in and out without raising turnover and at some point, the music will stop, and investors will notice.”
Despite the challenges, industry stakeholders are broadly positive about the future of P2P business lending.
4thWay’s Faulkner says the uptick in the economy means that more investors and quality businesses will again want to take part in P2P loans as either borrowers or lenders in the coming months.
“The market for non-property business lending will pick up again slowly and for property business lending it is already ramping up speed,” he says.
“However, expect P2P lending companies to keep their underwriting criteria especially tight for a while longer.”
The recovery of the market will be a relief to those alternative lenders who did not participate in government schemes. Although the recovery loan scheme (RLS) is running until December, this successor to the government’s previous loan schemes offers less financial support than its predecessors so should not create such an unlevel playing field.
Read more: Property Bridges inks €100m funding line
“For those that have managed to lend through the crisis some have potentially gained new customers, experience and links with institutional investors,” a spokesperson from the British Business Bank said.
“However, for others this may well have put back their plans and the markets they targeted pre-pandemic may not be as large as before.
“Many non-bank lenders and their investors show signs that they are ready to resume a greater level of activity throughout 2021, as some have been operating at a reduced level during the pandemic.”
Furthermore, the participation of some P2P platforms in state-backed loan schemes has highlighted the vital role the sector can play in the business lending ecosystem.
Platforms such as Funding Circle, Assetz Capital and LendingCrowd provided funding through the coronavirus business interruption loan scheme and Funding Circle also offered loans through the bounce back loan scheme.
More recently, both Funding Circle and Assetz Capital have been accredited to RLS.
With high street banks tightening their lending criteria, alternative lenders can step in and support growing businesses as we come out of the pandemic.
A recent survey of 500 high-growth SMEs from law firm Walker Morris found 77 per cent were unable to secure traditional bank financing, showing the need for alternative finance to fund their expansion.
The pandemic spurred record lending to SMEs in 2020, hitting £54bn over the first nine months of the year as 1.5 million businesses drew on government-backed loans, and the research found that many companies now require additional finance to invest in growth.
This goes some way to demonstrate the size of the opportunity for P2P business lenders.
“We expect challenger and non-bank lenders to play an important role in the provision of finance alongside the high street brands and as liquidity tightens later in the year, working capital support such as invoice finance will become more important once again,” says Stephen Pegge, managing director of commercial finance at trade body UK Finance.
P2P lending platforms have provided a lifeline to businesses during the Covid-19 crisis, whether accredited for the government loan schemes or not.
And once again, the sector has shown it can adapt and thrive in challenging market conditions.
The next stage is coming, and P2P business lending platforms are ready for it.