CREDIT WHERE IT’S DUE
Innovations in collections and recoveries
The new normal for business lending
Triodos’ Whitni Thomas on ethical investing >> 20
ISSUE 71 | JULY 2022
P2P platforms tipped to play vital role as government misses housebuilding target
PEER-TO-PEER property lending platforms have affirmed that the sector can play a vital role in funding the development of new homes after the government missed its new build target by 120,000. According to research from new-build sales optimisation platform Unlatch, in 2021 the government missed its new build delivery target by 39 per cent, or 120,000 homes. The target set out in the Conservative Party manifesto of 2019 was for 300,000 new homes to be built every year. P2P lenders have suggested that the alternative lending sector can help to close this gap, by providing funding to small- and mediumsized enterprise (SME) housebuilders who otherwise struggle to access finance. “It’s not a huge surprise the government missed its target, and P2P and crowdfunding can absolutely help in this
space,” said Atuksha Poonwassie, managing director of Simple Crowdfunding. “In essence, smaller homebuilders have found it more challenging to get funding, so P2P and crowdfunding platforms have stepped in to fill that gap which gets those projects funded which
means more homes built. “The processing structure has gone up significantly and it’s become more challenging. We can help with different funding solutions. “If the developer still wants to go ahead with a project, being more fluid with the finance piece of it will allow
them to continue that. If that project has a reduced profit margin, traditional lenders might not consider it when some alternative lenders might, by reducing the loan-to-value.” Assetz Capital, the UK’s largest P2P platform, has also been vocal about the vital role that SME housebuilders play in meeting national housebuilding targets and highlighted a lack of financial support from traditional sources of capital. “We have seen little appetite from high street lenders for SME lending since the financial crisis of 07/08 and money available from the public purse, through Levelling Up or other programmes, simply isn’t sufficient to meet our housing needs, especially as demand for new builds continues to outstrip demand for older properties,” Assetz Capital’s chief executive Stuart Law recently told Peer2Peer Finance News. “There is strong >> 4
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acroeconomic news is pretty gloomy at the moment but there appears to be no stopping peer-to-peer lending platforms in their quest for growth. Last month saw the UK’s largest P2P firm, Assetz Capital, get ready for a Seedrs fundraise, while European platform Twino is embarking on its very first equity crowdfunding round. Shojin Property Partners launched its secondary market, Assetz began offering development loans with a sales guarantee and Crowd2Fund has bolstered its board to support its next phase of growth. This is all highly encouraging. Public fundraises and new product launches suggest a confident industry that is powering on, full steam ahead. Not that this should be surprising, after a stellar performance during the pandemic. The wider financial services space typically experiences a summer lull in activity, but as we head into high summer, the P2P sector appears to be continuing with its plans unabated.
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cont. from page 1 demand from private investors for higher yielding, property-backed investments, especially where they can invest in diversified portfolios which they can manage flexibly and lower their risk profile. “P2P is a crucial method through which we can harness investor demand,
generate essential working capital for housebuilders, and boost construction output to meet the nation’s housing needs and support the economy.” State-backed support schemes introduced during the pandemic saw the government provide funding through a range of lenders, including
P2P platforms, and some stakeholders have suggested that this should happen again to support the SME housebuilding sector. Lee Birkett, chief executive of JustUs, has said that the government could specifically target funding for SME housebuilders and
bespoke construction projects via P2P platforms. “Like the British Business Bank lent alongside the crowd, the government could target new build funding or provide Bank of England access to cheap funding through alternative platforms,” he added.
Could P2P platforms benefit from embedded finance? PEER-TO-PEER lending platforms are yet to tap into the embedded finance space, presenting a potentially lucrative opportunity. The technology, which is predicted to become a multi-billion-dollar market by 2026, lets borrowers access finance from a fintech firm through a non-banking service such as an e-commerce platform. Funding Circle signalled embedded finance as an important market when it exited retail P2P lending earlier this year and has launched APIs through Funding Options’ Funding Cloud embedded finance platform and through Capitalise. Former P2P consumer lender turned digital bank Zopa has also expressed an interest in this area, while MarketFinance last month joined the Funding Cloud platform where
it will offer its business loans, invoice finance and business-to-business buynow-pay-later products. Mukarrum Iqbal, head of strategic partnerships management for MarketFinance, said other alternative and P2P lenders should consider this area to boost originations. “Customer experience is a key driver for business choices and embedding finance is a great way to offer greater convenience,” he told Peer2Peer Finance News. “Non-financial companies can work with innovative fintechs
to embed finance for customers at the point of need. “We are currently working with partners to embed credit for businessto-business transactions at the point of sale and can see the commercial benefits of including this, such as increase in gross sales, average order values, and frequency of purchases.” While a number of alternative and former P2P lenders have entered the embedded finance space, existing P2P players are yet to tap into this market. This may soon change, as industry
stakeholders insist that it can increase muchneeded access to funding for businesses. “With embedded finance, businesses can access the financial services they need, when they need them, within the platforms and interfaces they use in the day-to-day flow of life and work,” Mikkel Velin, co-chief executive of YouLend - which provides funding for customers of Shopify and eBay – said. “This is a huge advantage, as in order to increase financial inclusion and improve support for entrepreneurship, accessing finance should be simple and accessible.” Analysis by Juniper Research claims the increased availability of APIs will help the market grow and exceed $138bn (£112.6bn) by 2026.
Blend bullish on Northern Ireland property sector BLEND Network has tipped the Northern Ireland property market for new lending opportunities in the future, as the property investment platform builds a presence in the province. Earlier this year, Blend established its first Northern Irish office, hiring Philip Anderson as lending manager. The firm now plans to expand this presence with new hires to take advantage of the “buoyant residential market and limited supply of finance” in the region.
“The price of an average house in Northern Ireland has increased by nearly £28,000 since the start of the pandemic, equivalent to annual average earnings in the region,” said Anderson. “Data from the Nationwide House Price Index shows average Northern Irish house prices saw the secondfastest increase of all UK regions and nations last year (+12 per cent, yearon-year), higher than the average UK annual price rise and more than double that of London. “In 2019, before the
pandemic set off sharp house price rise across the UK, Northern Ireland saw the fastest growth in house prices (+3.2 per cent), more than six times UK growth (+0.5 per cent) at a time when the
average London house price was declining. “Similarly, we see very strong appetite from purchasers for finished units given lack of stock and supply and continued affordability.” However, Anderson added that challenges remain in the Northern Ireland market. He pointed out that there are limited sites available with necessary planning permission, while sewer infrastructure and the availability of other essential utilities can be limited in some rural areas.
Ethical P2P investors urged to consider B Corp status INVESTORS looking to use their money in a sustainable and ethical way are being urged to choose B Corp-registered platforms to ensure the business behaves as appropriately as the investment opportunities. B Corp status is a certification programme which demonstrates that a business has good environmental, social and governance fundamentals and promotes transparency. Businesses must make a legal commitment by changing their corporate governance structure to be accountable to all stakeholders not just shareholders. Of 5,000 businesses
with B Corp status worldwide, 15 are from the peer-to-peer lending or crowdfunding sector, including Abundance Investment and Triodos Crowdfunding. Bruce Davis, founder of Abundance, which achieved B Corp status in 2018, said the idea came from an employee. “Although Abundance and the investment it offers is focused on green and ethical investment it was useful to go through the process of accreditation and think about how our own business could live up to the B Corp principles,” he said. “We have an engaged
and active body of more than 1,000 shareholders who support our business but the B Corp model provides a framework for thinking about how our business supports all our stakeholders.” Ethical lender Triodos was the first panEuropean bank to achieve B Corp status in 2015, and has since launched an investment crowdfunding platform. Whitni Thomas, head of corporate finance at Triodos Bank UK, said it was an obvious step for the brand. “When you achieve B Corp certification, you become part of a movement for change, and
join a global community of like-minded businesses,” she said. “To be a B Corp means to drive for a shift to a new kind of economy that is better for workers, better for communities and better for the environment. “Meanwhile more people are asking questions of companies and looking for alternatives to how and where they spend and invest their money. They want to support companies that are sustainable, but it can be difficult to identify which ones those really are. Having accredited B Corp status helps.”
Want to launch in the EU? Join the club…
INALLY, NEW PEER -to-peer lending and crowdfunding regulation is coming to Europe – and Eurocrowd members have had a front row seat to the new regime. The European Crowdfunding Service-Providers Regulation (ECSPR) aims to transform the European business lending and investment-based crowdfunding market, by making it easy for platforms to register in one place, but operate in all of the 27 European member states and to carry out cross-border transactions. This is a major step forward for European P2Ps, but it didn’t happen overnight. For the past nine years, the European Crowdfunding Network - or Eurocrowd - has been working closely with the European Commission (EC) to bring P2P lending and crowdfunding into the mainstream, and to make it easier for platforms to do business across Europe. “We had a huge problem of access to finance for small and medium sized companies across the European Union,” explains Oliver Gajda, executive director of Eurocrowd. “Back in 2013, any new idea that looked interesting was at least being discussed. And so we were able to start a dialogue in Brussels and to offer an alternative way of financing small companies.” Within a year of this initial intervention by Eurocrowd, the EC had built a team dedicated to learning more about crowdfunding and P2P lending. This was the beginning of a close relationship between policymakers at the EC and Eurocrowd, which continues to this day.
Eurocrowd works closely with its members to collect information and support EC policy makers. When the Commission had questions about how P2P lending works, Eurocrowd fed this back to its members who were able to answer with real world examples. “We were able to create some very interesting results,” Gajda says. “Since then, the market has developed, and our members have developed.” While some individual countries passed laws to regulate crowdfunding as early as 2012, the launch of the ECSPR was the first time that a single law would be applicable to all P2P lenders across Europe. The regulations were finally signed off in late 2020, before becoming law in late 2021. A oneyear transition period will end in November 2022. “Our members were very involved with this, and were able to provide very detailed information and insight to all parties in the negotiation,” says Gajda. “We ensured that there would be good practice that leads to scalability.” Eurocrowd has been instrumental
in bringing this regulation to the EU. It has led its members through the entire process and continues to offer advice and guidance to its members today, with unparalleled access to the lawmakers and regulators. “This was a time when small- and medium-sized enterprise (SME) finance was lacking,” says Gajda. “And there was basically no real data on alternative lending and investing. But the concept was very interesting and the need for creating fast access to finance for all types of businesses or ventures was really important. “That’s why Eurocrowd was founded, with the goal to represent this nascent industry towards policymakers in Brussels.” Within less than a decade, Eurocrowd has done more than most for European P2P, and its members have reaped the benefits. As the ECSPR transition period comes to an end, there has never been a better time to join Eurocrowd and usher in a new era for P2P in Europe. Email firstname.lastname@example.org for more information on joining Eurocrowd
How can P2P property investors buck the downturn? HOUSE price growth has been slowing in recent months amid concerns that the cost-of-living crisis and interest rate rises will damage confidence among property buyers and sellers. For peer-to-peer investors who have chosen to put their funds into property-backed platforms, this will be a concern. There are a few headwinds hitting the housing market that could hit P2P property borrowers and therefore an investor’s portfolio if it includes bridging, buy-tolet or development loans. For example, Assetz Capital has warned of high prices for construction materials and labour shortages. This could hold up developments and add pressure to developers when repaying their loans. Another factor that could hit a P2P investor’s portfolio is house prices. Halifax suggested last month that prices have already started falling from their peak, with annual growth slipping from 10.8 per cent to 10.5 per cent and monthly growth falling from 1.2 per cent to one per cent. Estate agency Knight Frank is expecting house price growth to slow to five per cent this year. Falling prices could make it hard for borrowers to sell on or rent out
developments, which may be an issue if this is a means for repaying a P2P loan or if a platform needs to recover a property when a loan defaults. P2P property lenders and investment platforms have already been tested in recent years, with the pandemic putting their portfolios under pressure. This saw platforms such as Cogress and Octopus Choice pause lending at the start of the coronavirus outbreak and both have since closed. The key, as with any investment, is to do your research so you understand the type of loans a platform is backing, how much is usually borrowed and the risks involved. “In addition to real estate risk, platform risk would likely become an important consideration in any downturn,” Filip Karadaghi, managing director of P2P property lender LandlordInvest, said. “Stronger, and weaker, platforms become more evident during a downturn.” Slowing house price growth combined with rising interest rates and thus a higher cost of finance could deter developers and landlords from further projects, limiting the choice of loans. However, it may also make P2P lending more
attractive if mainstream banks increase their borrowing rates as alternative lenders do not tend to follow interest rate rises with their own products. Investors can also protect themselves through diversification. This may mean backing different loans across a number of P2P property platforms. Most P2P property lenders will give you the option to choose your own loans or invest in automatically diversified portfolios, depending on your individual preference and risk appetite. How much a P2P investment portfolio is affected by a downturn also depends on the types of property projects and their locations. Uma Rajah, chief executive of prime property lender CapitalRise, highlights that London is at a different point in the cycle as it has been in decline since the end of 2014.
“With prices circa 20 per cent below their peak values, the market appears to have bottomed out and is into the growth phase,” she said. “Savills is forecasting an eight per cent growth for prime central London in 2022 and 23.9 per cent over the next five years. “If the borrower is unable to repay, the property can be sold to repay investors and with typical loan-to-value ratios of 62 per cent, the investments provide strong buffers." It may even be worth thinking internationally. European P2P lender Estateguru gives investors exposure to property projects in the Baltics as well as Germany and Spain. “Each country has its own employment and inflation rates, liquidity and housing demands,” Judith Tan, head of capital markets at Estateguru, said. “The fact that Estateguru operates across eight different markets means we can offer more diversity to mitigate these variables across a whole portfolio.” Tan, and others, argue that there is a real need for affordable residential real estate regardless of economic conditions. Therefore, there are always likely to be attractive opportunities for P2P investors, as long as you do your research.
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Folk2Folk reports rising loan values
OLK2FOLK’S AVERAGE loan size has increased by 55 per cent, in a reflection of a trend towards larger property developments. “We have noticed that there are fewer small-scale property developments as a result of building material costs,” says Roy Warren (pictured), managing director of Folk2Folk. “For Folk2Folk, the average loan size is increasing. We’re seeing our average loan size go up from £340,000 up to £530,000.” However, Warren adds that less than a handful of Folk2Folk’s borrowers are currently in forbearance, thanks to the lender’s rigorous credit checking process and ongoing portfolio management. This prudent approach will come in useful as the platform is seeing an increase in applications for refinancing from other lenders such as banks. Folk2Folk is well equipped to handle these requests, taking its unique holistic approach to reviewing and checking each borrower and business. “During Covid, we implemented several operational changes, from application through to credit approval,” Warren explains. “We decided to retain all of these additional measures post-Covid. “Now, when assessing applications, we continue to consider how the crisis has, and potentially continues to, impact on each borrower. “We also enhanced our credit approval process, as part of our ongoing prudent and commonsense approach, to limit exposure to unnecessary levels of risk.” To balance the best interests
of its borrowers with those of its investors, Folk2Folk takes a strict approach to its portfolio management. The platform has its own internal definition of a default as a loan payment which is 14 days overdue. This is significantly shorter than the Financial Conduct Authority’s definition of 180 days. In order to keep default rates low, the platform fosters a culture of ‘no surprises’ by maintaining regular dialogue with its borrowers. Any missed payments are flagged internally within one day. This approach has helped Folk2Folk to maintain a track record of zero investor losses since the platform was founded in April 2013. In fact, the lender has recorded an average default rate of just 1.21 per cent per annum since inception – lower than the industry average of two to three per cent. This is a testament to Folk2Folk’s credit quality and ability to evolve along with market trends. And there will be more opportunities to evolve in the future, while staying true to the platform’s fundamentals.
“I think there are three key challenges for business lenders now: portfolio management and serviceability due to external economic pressures, and for us as an interest-only lender, there is risk regarding a borrowers’ exit if that is via a refinance,” says Warren. “We work to mitigate these risks via our portfolio management approach.” Over the next few years, Warren expects to see continual growth in challenger banks funding businesses via platforms like Folk2Folk, as well as looking to make acquisitions. “I expect further consolidation within our sector, particularly if bad debts increase which could be the demise of some other platforms,” he predicts. Even as loan values rise, Folk2Folk will stay true to its roots by offering a ‘fair exchange’ to its borrowers and investors by applying its tried-and-tested due diligence to every potential loan, while enabling businesses in the underserved rural and regional parts of the UK access to much needed finance to grow, develop and diversify.
COLLECTIONS AND RECOVERIES
Prevention is better than cure
Collections and recoveries may be about to rise, but savvy peer-to-peer lending platforms have been innovating in this area for years. Michael Lloyd reports…
TS HARD TO THINK ABOUT collections and recoveries without conjuring up images of bailiffs at the door, and repo vans on the curb. But in peer-to-peer lending circles this is an outmoded idea. In reality, alternative lenders have been working for years on perfecting the recoveries process in the most ethical, effective way. And the figures speak for themselves. Despite years of pandemic-led volatility and an ongoing cost of living crisis, P2P lending platforms have managed to keep their default rates relatively low. This is largely due to their use of new credit checking technologies and processes
which have effectively reduced the risk of default from the very beginning of the borrower journey. But that doesn’t mean that collections and recoveries are not happening in the P2P universe. While P2P lending platforms aim to collect money in a socially conscious way, recovery procedures are usually the final options. After all, prevention is better than cure. During the pandemic, Folk2Folk grew its credit risk team instead of its collection division for this very reason. “We want to help businesses but won’t take on anything that doesn’t meet our strict criteria so we’re
not lowering our standards,” a Folk2Folk spokesperson said. “Who knows what will happen, but we are just are very vigilant and are constantly looking for any early warning signs of difficulty. We are as tight as we can be on the credit side of the business.” Filip Karadaghi, co-founder of LandlordInvest, says the P2P platform only works with established property professionals and only underwrites loans where it is comfortable with the risk. Open banking can help platforms carry out this underwriting. New P2P consumer lending platform Plend focuses on using
COLLECTIONS AND RECOVERIES
the data-sharing initiative to better assess the affordability of potential borrowers seeking the platform’s unsecured loans. “The big thing for us is the underwriting,” says Rob Pasco, cofounder and chief executive of Plend. “The ability to gradually review
“We are hyper cautious and monitor our loans very actively,” he explains. But of course, defaults happen. It is then that P2P platforms have to step in to decide whether to proceed with a recovery action. You can tell a lot about a company by how it treats the people who owe
“ We are just very vigilant and are constantly looking for any early warning signs of difficulty
the bank statements of new borrowers is absolutely vital. We take income stability as a vital indicator. Credit history can be irrelevant, it’s about what you’re paying today.” Assetz Capital chief executive Stuart Law says the P2P lending platform prefers to issue fewer loans of a larger size, which allows it to micro-manage each one and watch out for any signs of problems.
them money. Most P2P platforms do their best to recover investor funds in a socially conscious way, by working closely with the borrower rather than taking an aggressive approach. In fact, P2P platforms have pioneered new ways of dealing with non-performing loans, offering forbearance and payment plans long before the Covid-19 pandemic made borrower flexibility the norm.
At the start of the pandemic, when the City regulator started issuing guidance on the subject to lenders, P2P platforms were very quick to contact borrowers and offer payment holidays to support them and then communicate this to their investors. This is not just the most ethical route, but according to platforms, the most efficient. “Working with the borrower typically produces the best outcome for everyone,” says Law. “It’s better to work with them than be aggressive.” Neil Faulkner, managing director of P2P ratings and research firm 4th Way, believes that most platforms genuinely care about their borrowers, even when they get into difficulties. “One or two platforms have a reputation for being extremely aggressive, but I believe that the vast majority of platforms work well with borrowers and try to do everything they can to recover debts in an ethical way,” he says.
COLLECTIONS AND RECOVERIES
Nicola Horlick, chief executive of Money&Co, describes being ethical as a “very” important part of the recovery process. “You have to treat people properly if you are going to recover money lent,” she says. Rishi Zaveri, chief executive of Lendwise, says that his platform has fixed interest rates and engages with borrowers that are overdue on their repayments. “We follow all the rules and are mindful that any customer who falls into arrears doesn’t want to be in that situation,” he says. “So, it’s one where we want to engage, understand and find an outcome that solves the problem for all parties concerned.” If working with the borrower does not work, by and large platforms are then forced to move to the next stage of appointing a solicitor or receiver. The threat of court action only comes as a last final step if all else has failed. Instead of doing collections inhouse, some platforms use debt collection firms that specialise in this line of work and will conduct the process ethically and efficiently. Alex Hilton-Baird, managing director of Hilton-Baird Collection Services, which works with P2P platforms, says that his firm’s focus is on telephone-led recoveries, building a rapport with borrowers and being firm but fair and transparent. “We believe this approach drives the best results for all stakeholders and enables us to identify and work with vulnerable customers to help them repay in line with what they can afford,” he says. “For the majority of platforms we work with, we focus on early arrears collections, curing arrears and getting them back into the
‘good book’. But we also support full recoveries all the way through to legal enforcement if and where necessary.” Last month, Plend partnered with Ophelos to help customers resolve their debt in an ethical way. The debt collection firm, which has a Pending B Corp status which demonstrates its environmental, social and environmental
fundamentals, uses machinelearning technology to simplify and automate the debt resolution process, allowing borrowers to set up manageable instalments through personalised repayment plans. “It has an amazing, radically different approach,” Pasco says. “There is no calling or letters in the post, they send customers a link to refinance with no friction.”
“ The vast majority of platforms work well
with borrowers and try to do everything they can to recover debts in an ethical way
COLLECTIONS AND RECOVERIES
“ Above all else it’s about knowing your
customer, the affordability of the borrowing, their ability to repay and their viability
Selling off bad debt via securitisations is another way in which platforms can collect funds for their P2P investors. For example, Funding Circle has previously sold defaulted loans to Azzurro Associates. Now, the debt buyer – which is owned by US asset manager Elliott Management – plans to purchase more P2P business lending portfolios. “The portfolios we have acquired are performing to plan, and we retain appetite for further such transactions,” Andrew Birkwood, founder and chief executive of Azzurro Associates, told Peer2Peer Finance News in May.
“It is part of our strategic intent to acquire more P2P business lending or B2B receivables portfolios.” As the country falls deeper into a cost-of-living crisis with the Bank of England predicting a recession soon, platforms are being extra careful and focusing on the affordability of borrowers while monitoring their loans and the markets in which they operate. Ben Shaw, chief executive of HNW Lending, says that for his platform the focus is on creditworthiness. “We are a little concerned so we are looking more closely at affordability and ensuring we think carefully when writing our creditworthiness assessment report,” he says. “We often ask the borrower for additional information so we can make a better assessment.” Law says Assetz Capital has boosted its collections and recoveries teams over the last year, but that was due to keeping up with the platform’s growth, rather than reacting to the threat of a Covidlinked spike in defaults. He says the platform has not seen a surge in recovery activity but is closely monitoring big economic factors such as inflation and house prices. However, Hilton-Baird warns that platforms should be worried about the possibility of rising defaults, especially in those instances where they are not the sole lender to the business. “Above all else it’s about knowing
your customer, the affordability of the borrowing, their ability to repay and their viability,” he says. “Beyond this, our advice would be to take a sector analysis of your portfolio in terms of identifying which customers might be under more pressure than others, and within those looking for and refreshing information about customers’ ability to repay.” So far, P2P platforms’ collections and recoveries processes have performed well during the pandemic and are predicted to withstand worsening economic conditions. “Collections and recoveries have mostly worked very well, although they have been delayed by a massive backlog in the courts, caused by their temporary closure during the pandemic,” says 4th Way’s Faulkner. “I expect that judges will continue to offer borrowers some leeway due to the rising cost of food, energy and other important goods. But ultimately, borrowers who have cash, property or other assets will usually still be made to settle their debts. “Therefore, P2P lending platforms' recovery processes will withstand the cost-of-living crisis.” Times may get tougher but P2P platforms now have proven experience during a turn in the economic cycle. Even if defaults rise, these firms will continue to focus on ethical recoveries and on prevention rather than cure, through regular monitoring of the situation and careful underwriting.
Why Kuflink believes the UK P2P market is “very strong”
UFLINK WILL NOT BE expanding into Europe in the near future, as chief executive Narinder Khattoare hails the UK’s peer-to-peer lending market as “very good and very strong”. New EU legislation will soon come into force for crowdfunding and P2P platforms on the continent, and industry stakeholders have warned that these new laws could make it harder for UK platforms to expand across Europe. But Khattoare (pictured) does not believe that UK platforms are missing out. “The whole lending spectrum is different to here in the UK,” says Khattoare. “There are some great opportunities in the EU but you have to have the right people. I have already seen the mix of the people who run these businesses - some are very experienced and others have little to no experience whatsoever.” He points out that the UK has already been through this regulatory bedding-in period, as the home of the first-ever P2P lending platform way back in 2005. Since then, regulation of the UK’s P2P and crowdfunding sector has intensified, resulting in a number of exits as well as new opportunities for growth. “I believe we are ahead of the game here, hence why we are performing so well,” Khattoare adds. “There are some great people running platforms here in the UK and they have the right people within their businesses too. We have a great trade press here too who get the message out which always makes life easier for businesses like us. “I can’t comment on other businesses expanding into Europe,
but we have no plans as we continue to bring new products here and further enhance our offering.” Khattoare believes that UK platforms should focus on mastering their own product offerings at home before considering expanding into new territories. “Get a better understanding of your own market and have some traction there before moving into other countries,” he says. And this advice applies to European platforms mulling a UK entry as well. “They need to go through a whole circle of lending, recovering and potentially losing some money for them to go into other territories,” says Khattoare. “I always think you need to have a plan in advance if you have aspirations to go abroad and what the key objectives are and what can you bring to the table that others aren’t offering in the current country. If there is already a similar
provider then what separates you apart from them?” Khattoare is not convinced that there is space in the UK market for new entrants from Europe, saying that it will depend on their product offering. But ultimately, he is evangelical about the strength and potential of the UK P2P market, which he credits as being “down to the calibre of people who run the businesses”. “There is a lot of experience here and people who are looking to build some serious businesses that give back to borrowers and investors,” he says. “We’ve seen others collapse due to ridiculous lending rates and in some cases fraud – the ones that remain have reputable businesses that have longevity in them. The key is the talent and tech which some businesses are producing which make the UK P2P sector very good and very strong.”
Entering into a ‘new normal’ The business lending sector has not been operating in “normal” conditions for some time. Michael Lloyd explores the use of personal guarantees and emerging opportunities in a challenging economic environment…
EER-TO-PEER BUSINESS lending conditions have not been ‘normal’ for some time. Over the past two years, statebacked Covid lending schemes have completely changed the business finance landscape and distorted the marketplace somewhat, with unaccredited lenders unable to compete against the low rates on offer. With the end of the recovery loan scheme (RLS) on 30 June, business lenders would be forgiven for expecting a return to pre-pandemic conditions. But the year is 2022, and normal is a nice memory.
Mid-way through the year, war has gripped Ukraine, the annual inflation rate has hit a 40-year high, the base rate has reached a 13-year high, and the Bank of England has predicted an imminent recession. There will be no return to the halcyon days of 2019. Instead, the alternative lending sector is heading into what we could call a ‘new normal’. As the economy contracts and the RLS ends, a successor scheme will continue to support small businesses. According to reports, the £3bn scheme will offer loans of up to £2m to small- and mediumsized enterprises (SMEs), backed
by a 70 per cent government guarantee, but unlike its predecessors, it will require personal guarantees (PGs) from borrowers. Many P2P platforms already ask for security or PGs, but these are likely to become increasingly important as they become more careful about their lending. Nicola Horlick, chief executive of Money&Co, says that her platform sometimes asks for PGs from borrowers, but it depends on their financial position, as “there is no point” in taking a PG from someone who will never be able to
A personal guarantee makes most people think a lot harder about whether they will actually be able to repay the loan
honour it. She also highlights that the platform prefers security. “We much prefer to have specific assets to secure on rather than relying on a personal guarantee as this is likely to be better for our lenders,” Horlick says. Ben Shaw, chief executive of HNW Lending, says although his platform is already conducting asset-backed lending, it has always required PGs too. “A PG makes most people think a lot harder about whether they will actually be able to repay the loan,” he says. Neil Faulkner, managing director of P2P ratings and research firm 4th Way, says although there is little data on the impact of PGs on loan performance, they can bring the benefit of encouraging borrowers not to default. “Since few lenders offer businesses loans without guarantees, there's little downside to P2P lending platforms that require them, since they won't be outcompeted by more attractive terms,” he says. “Anecdotally, the greatest impact of guarantees is probably that they encourage directors not to default on their debts in the first place.” JustUs chief executive Lee Birkett says that his platform only requires PGs for borrowers it has not worked with before, and for deals with a high risk profile. He goes on to say these will become more important in the sector, but only if they are underpinned by assets. “P2P platforms will be asking for
PGs now if they’re a responsible lending platform and the loan isn’t backed by security,” Birkett says. “They only have a benefit if there are assets behind the PG, it’s not worth the paper it’s written on if there are no assets behind it.” Assetz Capital – the largest P2P platform in the UK – generally requires PGs to protect investors’ capital, prevent fraud and ensure the safe recovery of loans. Chief executive Stuart Law says that the platform may participate in the RLS successor scheme, even if it comes with mandatory personal guarantees. “We are reviewing the RLS successor and will make a decision on that in due course,” Law says. “We were a significant lender
in the pandemic both through RLS and [its predecessor] the coronavirus business interruption loan scheme, providing hundreds of millions to SMEs that needed it at one of the most challenging times for businesses in modern history. “In line with our focus on supporting UK SMEs, we will continue to look at opportunities to work with public sector partners, but our main focus must naturally return to businessas-usual lending to support UK businesses through both our P2P lending platform and wider institutional funding.” If P2P lenders wish to take part in the RLS successor scheme, they will have to get to grips with the intricacies of PG-backed loans. Several platforms have previously highlighted problems with borrowers who have given PGs to different lenders with different loans at the same time. ChargeCheck – a global register
for sureties, charges and guarantees – is working to change this with its plans to introduce a PG register for lenders, including P2P platforms. It is hoped that the new PG register will be launched within a few months. “At the moment you’re able to take out as many PGs as you like and other than a borrower disclosing this, there’s no way of checking,” says Tom Spanner, chief executive of ChargeCheck. “We’re trying to provide somewhere to check. We’ve been working with industry leaders, banks, regulators and insolvency practitioners all to build the product to their specification.” In the aftermath of the government loan schemes and the cost-of-living crisis and inflation, platforms find themselves operating in a challenging business lending environment. But Assetz’ Law says that despite these challenges, businesses still need to be supported. “We are undoubtedly in very challenging economic times, with a very real possibility of a recession, whether modest or otherwise,” Law says. “Across public policy and the lending market, we need to do all we can to support businesses and promote a thriving economy.” P2P business lending platforms are being careful in their lending, focusing on due diligence, security and PGs. And some, like Money&Co, are looking elsewhere to specialist
niche sectors. Ahead of an expected recession, Horlick says that her platform is being very cautious when making lending decisions and is continuing to work on litigation funding and music loans which will be unaffected by a downturn. She says the platform is looking at how lending in the agricultural sector might work and expects to enter this market within the next 12 to 18 months.
“ We are undoubtedly in very challenging
economic times, with a very real possibility of a recession, whether modest or otherwise
“It is very difficult for tenant farmers to borrow from banks,” Horlick says. “They can offer security and they deserve to be able to borrow.” It has been well documented that the government-backed lending schemes distorted the P2P and alternative lending marketplace, however, according to platforms and industry stakeholders this distortion is now fading. A new form of normality is returning, marred by challenging economic conditions. “The ship is holding fairly steady with stormy waters,” says Law. “There is the collapse of supply chains, the reversal of globalisation, the Ukraine war, but the economy
“ All this chaos gives opportunity for more nimble lenders to take market share
seems to be weathering those storms and carrying on regardless.” As some sense of normality returns, P2P business lending platforms have been reporting good pipelines of deals and opportunities. “At the beginning of the year we weren’t seeing enough deals that warranted putting investor money in, we thought the risks were too high, but we’re now seeing more deals we want investors to put their money into,” says HNW Lending’s Shaw. “With what we have got in the pipeline I’m optimistic we will provide a lot of good loans for our lenders, and I think we will have a decent performance out of those loans.”
Charlotte Marsh, managing director of ArchOver, says that her business lending platform saw a “strong start” to the year, followed by a quieter period due to the nature of opportunities that it is working on. “We should start to see larger projects reaching the platform in the coming weeks,” she says. “We have received a positive uplift in enquiries relating to management buyouts and acquisitions. Our team is managing a strong pipeline of opportunities and as these are largely transactional, completion can take some time.” P2P business lending platforms expect the sector to grow its
volumes as banks pull back their lending. Law says this presents a huge opportunity for P2P and describes the future of the P2P business lending sector over the next few years as “very positive”. “We anticipate demand to continue to grow for P2P and other alternative finance solutions given the current climate and the fact the banks are clearly pulling back their support according to Bank of England data,” he says. “All this chaos gives opportunity for more nimble lenders to take market share. I think every time the banks step back it’s quite difficult for them to step forward and take back what was lost.” The P2P business lending sector is returning to a ‘new normal’. Market distortion is ending, and new opportunities are emerging, but wider economic challenges remain. P2P platforms are well placed to weather the coming storm, with a strong track record of cautious lending, and an emphasis on security, whether via assetbacked lending, PGs, or a combination of both. The ‘new normal’ is shaping up to be a very interesting place, with P2P platforms poised to take more business away from banks, and business borrowers able to take advantage of the flexibility and accessibility that only P2P can offer.
Creating positive change
Whitni Thomas, head of corporate finance at Triodos Bank, talks to Marc Shoffman about the importance of social impact investing
NVESTMENT BANKING MAY not be seen as the most direct way to get into social enterprise funding, but Triodos Bank’s Whitni Thomas started her career as an associate at JP Morgan and is now running the crowdfunding side of the ethical lender. She explains how she went from investment banking to sustainablybacked crowdfunding. Marc Shoffman (MS): What attracted you to Triodos Bank? Whitni Thomas (WT): I come from a family with public service orientated careers, so it was actually an oddity that I ended up in banking. Triodos gave me the opportunity to use my investment banking background, but to do so with an organisation with values at its heart. All our projects at Triodos have a clear purpose around making the world a better place, supporting individuals or having a positive impact on the environment.
and introduce them to investors. Online platforms were developing, but we were still doing things in an analogue way. We partnered with a few online platforms and then we decided in 2017 to develop our own offering, which launched in 2018.
MS: When was the crowdfunding site launched by Triodos and why? WT: The bank for a number of years had sporadically assisted pioneering social enterprises, for example Cafédirect, and had helped them access capital directly from investors. Starting in 2010, we were seeing more social enterprises, charities and environmental organisations needing access to capital where a secured bank loan wasn’t the right fit. We decided to set up a corporate finance team to advise organisations
MS: What type of projects can investors back? WT: The common thread is they need to have an investable business model and commercial operating model, they have to be suitable for repayable capital. They need to be able to demonstrate the positive impact they are having. We take a more proactive approach in that regard, not saying just do no harm, but what difference are you making?
We tend to prefer organisations and projects where the impact is embedded in the business model as opposed to where it just gives away a percentage of profits, for example. We want it baked into the DNA. Examples include communityowned renewable energy, where all surplus revenue is passed back locally. A great example is currently live on the platform in the shape of Empower Community Foundation. It is a £4.7m bond that has a term of 16 years paying 4.25 per cent gross interest annually. The interest rate will rise with inflation each year. Social enterprises are another example. We are currently hosting a £1.5m charity bond from one of UK’s largest charitable social enterprises, London Early Years
Foundation (LEYF). They are a nursery provider offering highquality and affordable options, particularly for those from disadvantaged backgrounds. MS: How do you find projects? WT: We are lucky enough to be part of Triodos Bank, getting enquiries through business lending colleagues, we also get a number of projects that come through client referrals and we get a third directly through the platform. Unlike other platforms, we are very much a corporate finance team first and a crowdfunding platform second. We need to understand the business model, growth ambitions, and structure the investment to balance the requirements of the company raising the capital and the prospective investors. Some enquiries just aren’t suitable because they are very early stage, some of the organisations that approach us are not a mission fit and some just aren’t credible financially. MS: Do you get the projects that are too risky for a bank? WT: It’s an opportunity for us because banks are looking at ability to repay, fixed assets or buildings to secure on, whereas we are looking at the cashflow of the company and the ability to repay the debt. We are able to raise unsecured debt whereas the bank will only do secured so some rejected loan applications to the bank can be a good fit for us. MS: What type of returns are investors getting? WT: Returns are around five per cent for some of the charity sevenyear bonds.
Some of the investment opportunities in the past two years have been at around six per cent where there is more risk in the business model. Most of the investments can be held in an Innovative Finance ISA. There is no secondary market, but the bonds and shares are always transferable and we will facilitate transfers if an investor can find someone to sell to. There is no bulletin board, but this is something on our roadmap. We are clear these are buy to hold investments. Since we have been doing this, we have funded coming up to £190m over 15 years for more than 80 projects. MS: Why is social impact investment important? WT: Based on our surveys of investors, people are generally looking for a reasonable financial return, an investment plan and something not correlated to mainstream markets. The reason for coming to us is because of the types of organisation, for example they want to be investing their money into providing homes for people with disabilities or generating clean energy. The 2008 financial crisis was an awakening for people who realised what banks are doing with their money and they could see what happened if the system collapsed. The work of David Attenborough and the COP26 in Glasgow have also caused a massive acceleration of people concerned about the planet and climate change. MS: Are you worried about future regulations? WT: We have seen the development since the Financial Conduct
Authority (FCA) first brought in regulations. I would say on the whole, the vast majority of the rules were sound and sensible in the early years. Those who work collaboratively through the UK Crowdfunding Association (UKCFA) have been able to create a good dialogue with the FCA. The past 12 months have been more challenging as the FCA tries to navigate its way through the collapses that have actually happened in unregulated sectors. Our main concern is that we need and want to ensure every single one of our investors is clear on the risk he or she is taking. It would be a shame if this type of positive impact investing went back to being the preserve of high-networth or sophisticated investors. We understand consumers need to be protected and want proportionate regulation, we want to ensure we can continue to offer this to everyday retail investors. MS: What’s your outlook for the business? WT: We are focused in the team on helping create positive change in society and enabling organisations to access the capital they need. We want to make sure our platform’s investors have a steady stream of opportunities to choose from throughout the year. For us that means offering seven to 10 investment opportunities ideally in a year. We are going to continue along those lines and will be boosting awareness. We have recently re-launched the platform with a new design and more user-friendly experience. We are keen to grow our presence, particularly in terms of crowdfunding activity.
Assetz Exchange is a property investment platform delivering long term stable income for investors, primarily through the purchase and leasing of housing for social good. Regulated by the FCA, it provides the opportunity for investors to create a diversified property portfolio and alternative funding options for the housing sector. www.assetzexchange.co.uk T: 03330 119830 E: email@example.com Folk2Folk is a profitable UK lending and investment platform. More than half a billion pounds has been invested via the platform with no investor losses to date. Loans are a maximum of five years, secured against land/property at a maximum 60 per cent LTV, with a fixed rate of typically 6.5 per cent, per annum. www.folk2folk.com T: 01566 773296 E: firstname.lastname@example.org Invest & Fund is an established alternative finance platform, that has deployed over £107m on behalf of clients with zero per cent bad debts written off. Lenders can achieve a diversified, asset-backed portfolio with gross yields starting from 6.5 per cent per annum with an option to lend through an ISA or SIPP for tax-free returns. www.investandfund.com T: 01424 717564 E: email@example.com JustUs is an innovative peer-to-peer lender that provides a range of consumer and property-backed loans. It has lent out almost £15m and paid more than £1.1m in interest to lenders to date. Investors can enjoy returns of up to 9.61 per cent, with all products eligible to be held in an Innovative Finance ISA for tax-free earnings. www.justus.co T: 01625 750034 E: firstname.lastname@example.org Kuflink is an award-winning lender and online investment platform. With over £156m invested through the platform, investors can customise their own portfolio investing in specific loans or in a pool of loans diversified across a number of opportunities. Earn up to 7.49 per cent (compounded) per annum, with an IFISA available. www.kuflink.com T: 01474 33 44 88 E: email@example.com Lendwise is the UK’s only peer-to-peer lender that is dedicated to impact investing in education finance. Investors finance education for borrowers at universities and business schools across the UK and globally. Investors define their own risk appetite and use Lendwise’s AutoLend feature to diversify their strategy across a pool of loans, which can be invested in an IFISA wrapper earning average returns of up to 9 per cent per annum. www.lendwise.com T: 0203 890 7270 E: firstname.lastname@example.org
SERVICE PROVIDERS AND INDUSTRY ORGANISATIONS
The European Crowdfunding Network is an independent, professional business network promoting adequate transparency, regulation and governance in digital finance while offering a combined voice in policy discussion and public opinion building. It executes initiatives aimed at innovating, representing, promoting and protecting the European crowdfunding industry. www.eurocrowd.org E: email@example.com Q2 creates simple, smart, end-to-end lending experiences that make you an indispensable partner on your customers' financial journeys. Its modular platform gives you the ability to manage lending simply throughout the entire loan lifecycle, from application, onboarding, servicing to collections. The result is a better experience for both borrowers and lenders. https://eu.q2.com T: 020 3823 2300 E: info@Q2.com
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