Following on from the two posts that explain equity and reward based crowdfunding, we move on to debt-based crowdlending, also known as Peer to Peer (P2P) lending, sometimes Market Place lending and in FCA speak as debt based investing. For brevity I’ll use P2P, although this is somewhat confusing as some of the borrowers are businesses, or P2B. A newcomer to alternative finance, whether it be through conversation or news, is more likely to have heard of crowdfunding, largely due to press interest in that specific area of FinTech and in particular the innovative crowd raises that businesses and individuals have employed. Yet in the UK, the P2P lending industry is worth just under £4.5 billion, compared to £132.5 million cumulative total raised through crowdfunding. Borrowers are attracted by a less clunky process that is competitively priced and easy to use. The vast range of alternative finance solutions available means that both businesses and consumers can find a loan tailored to their needs. Lenders, meanwhile, are drawn to the sweet spot of statistically lower risk investment at interest rates that go beyond the bounds of anything offered by a bank.
The P2P lending sphere can be broadly broken down into three categories: P2P consumer loans, P2P business loans and invoice financing. The biggest player in the consumer loans market is Zopa, who are the oldest and arguably the biggest alternative finance company in the world. They have lent over £1 billion to consumers at an average loan size of £7,500, offering investors a return of 5%. Every consumer loans company is only as good as their borrowers; Zopa have reported 0.04% actual defaults so far this year, a figure which is made even lower by the Zopa Safeguard Trust which helps pay-out in case of bad debts. The fund is taken from the fee that each borrower pays when their loan is approved. Another of the major P2P consumer lenders, RateSetter, have their own provision fund to help bail out lenders to borrowers who have defaulted. RateSetter operate a platform that allows lenders and borrowers to pair up through a process of bidding, over four set term lengths. The model has proved very popular with both individuals who appreciate the transparency of the loan structure and lenders enjoy decent interest rates. RateSetter also offer business loans in the region of £25k to £1 million.
The business lending market is diverse for both investors and borrowers; loan size, terms, length, funding and structure vary from platform to platform. Just dipping a toe into the water in terms of range and variety, you can facilitate finance for property loans through Assetz Capital, Wellesley have their own listed bond that offer lenders 4.75% per annum over three years or 5.5% per annum over five, Folk to Folk specialise in regional lending in the South-West, Landbay secure lenders’ money against residential mortgages, MarketInvoice and Platform Black allow investors to access funds in outstanding invoices and factoring. The list goes one: the Best place to explore the full array of P2P operators and the services they provide is on the AltFi news website. The banks do not appear to have the will or resources to compete, despite their own admission that most of the platforms are supplying an updated version of services that they have provided for years.
Mitigate the risks and P2P Lending is a fantastic way to save wisely whilst helping SMEs and consumers drive UK economic growth. The incoming Alternative Finance ISA will bring in a whole host of new lenders; it is crucial that the industry is properly regulated and that platforms adapt sufficiently to ensure that the optimism continues.