Why P2P lending is not a silver bullet

Posted on Posted in David Postings

The myth of the P2P panacea

I am in favour of anything that increases choice and enables the UK’s SMEs to access the funding they need to grow. The peer-to-peer (P2P) lending market has grown substantially since the first provider, Zopa, arrived in the UK in 2005, with the market surpassing the £1 billion funds advanced mark by the end of last year. To be clear, this is the total of all loans and not the funds-out at any one time.

Unlike many traditional funders, however, new players on the financing spectrum have been welcomed by government and policymakers alike, without so much as a hint of caution. Politicians, particularly, have viewed this newly emerging sector as a panacea that will shake-up the market and solve the funding needs of small businesses forever.

Moreover, it has been branded by some as the ‘Uber of finance’, supposedly disrupting an uncompetitive or dysfunctional market that was ripe for innovation. This narrative, though appealing in its simplicity, is far from the truth.

The UK has long boasted a healthy and highly competitive alternative financing sector, which it should be proud of. But, all too often, policy-makers ignore an already mature sector; seeing competition in the market as a two-horse race between major high street banks and shiny-P2P lending platforms. They seem to love the new, just for its novelty.

But, it’s the alternative middle-ground that has proved itself time and time again. In fact, just this month the Asset Based Finance Association announced that £18.9 billion was lent to businesses in the first quarter of 2015 – a £1.2 billion increase year-on-year. Through bull and bear markets, independent funders and asset based lenders have demonstrated their longevity and local presence in the UK market. This strong track record is largely ignored as it is not new. It is, however significant and most importantly, it provides real support for businesses when they need it. It did so right through the last recession and helped prevent the downturn being even worse.

The limitations of youth

Despite the halo effect surrounding new market entrants, these platforms still account for only a tiny fraction of SME lending in the UK. Furthermore, funding amounts advanced to SMEs are limited and cannot yet satisfy the full range of business needs.

Notwithstanding its attractiveness to media and government alike, awareness of this lending option is generally low among business owners. Our quarterly SME Tracker found that just 1% of SMEs used P2P or crowdfunding in Q1 and half of the small businesses we surveyed for our SME Manifesto in May said that they would not use a P2P lender.

It’s evident that many do not share policymakers’ enthusiasm for these lenders and  owners and decision-makers explained that they either distrusted P2P lenders or felt they would not be able to get the financing that would be right for their business through this channel.

Apples and oranges

A fundamental problem with debating comparable merits of different funding types is ensuring comparison on a like-for-like basis. A P2P lender provides funding pure and simple – not credit control, sales ledger management or payment collection. Many can’t offer multi-lingual or multi-currency services, helping businesses to enter new markets or import goods from overseas.

Fundamentally, P2P lending is more about delivering an investor return than the provision of funding and services to small businesses.

Strong funder, strong future

Looking ahead, the UK faces a referendum over its membership of the EU and a tough monetary policy decision on when and how interest rates will change. As recent years have proven – we are never too far away from the possibility of a return to recession. It will be fascinating to see how the market fares through the whole economic cycle. The lack of a capital buffer may expose unwary investors to more risk than they bargained for.

I wish all lenders well and believe there is room in the market for us all. What we do need is more balance when it comes to evaluating options.

Earlier this month, our research found that 14 per cent of SMEs use loans from friends and family to fund their business with a quarter (23 per cent) using a bank overdraft. As this period of political and economic uncertainty continues, SMEs must future proof themselves from financial shocks by ensuring that they have sustainable and flexible sources of funding, tailored to their needs. This could be a combination of financing types, including overdrafts, leasing, loans, invoice finance or even P2P.

However, we must recognise that financing in 2015 should have a wider purpose beyond simply offering a lump-sum. Funders have a larger role to play in society – managing relationships with customers and suppliers and helping small businesses position themselves for growth.

It is here that a finance provider can become an extension of an SME’s own team; a role that many independent funders are proud to play.

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