Business Borrowers Should Think Outside the Bank

Over the shoulder shot of a businesswoman reading a cash flow report. Shallow DOF, focus on the paperwork.

Although this indicated article is somewhat of an advertisement for a UK-based 2014 startup named ‘LendingCrowd’ (we’ll let you guess their business specialty) based in Edinburgh, Scotland, it is an interesting topic nonetheless. Peer-to-Peer lending for small businesses is not new, as those of us on this side of the pond can recall from Lending Club and Prosper, and surely not without lender risk. One of the points made in this piece is that SMEs in Scotland account for ‘more than half’ of all private sector employment.  This is not dissimilar to the world in general, although SME definitions vary widely. In the U.S. for example, there are about 102 million people employed and we would estimate that roughly 60% work for businesses with less than 100 employees. Among these are about 24 million businesses with no employees (sole-proprietors).

They key to this business space however is to help fill a liquidity gap in the market that banks are either unwilling or unable to accommodate, given capital regulations, asset risk ratings, liquidity ratios and so forth. But the fact small businesses have a tough time getting bank loans is also nothing new, since banks are in the risk management business, and well, small businesses are generally riskier than bigger versions. This is one reason why small businesses to some extent rely upon personal and business cards to fund working capital requirements. So the P2P platforms help to fill this gap by allowing Joan and John Q. Public to have alternative places to invest, thereby creating more liquidity for businesses that need funds here and there. So, no real difference in the UK or most places, and technology allows for more economic involvement, if one so chooses.

‘While the uncertain outlook amid the ongoing Brexit negotiations may cause traditional lenders to restrict their appetite for funding, small businesses are increasingly thinking outside the bank when it comes to their options for funding….According to research from the British Business Bank , published on 20 February, net bank lending remained “relatively flat” in 2017, while P2P business lending volumes rose by 51% to almost £1.8 billion.’

Another interesting dynamic is the acronym IFISA (Innovative Finance ISA), which requires that you know what is an ISA in the UK. These are investment savings accounts, so think somewhat of the equivalent of an IRA or Roth account, except on steroids (GBP 20,000 annual limits). So the IFISA version sounds pretty cool since it is a special tax-free interest vehicle for investors in P2P lending, with an annual limit of about GBP 15,000.  A nice tax incentive handed to the alternative lending market, and in tune with the ‘open banking’ initiatives coming out of Europe (think PSD2). The vendor in this case has to get approvals from some other government places with acronyms like FCA and HM Revenue and Customs, but sounds worth it to me.

‘The introduction of the IFISA, combined with robust and transparent credit data on borrowers, means that more investors are opening their eyes to the opportunities made available by lending directly to home-grown success stories. As well as offering healthy returns for investors, P2P generates real benefits for the wider economy by providing access to finance for small and medium-sized businesses who may struggle to secure funding from the banks, which are busy cutting back on their branch networks.’

 So, more things happening in the alternative tech space for fin services, but to paraphrase the old saying ‘caveat emptor’, we say let the lender beware, so do your homework.

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group

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