B&C heard from Nick Moules of peer-to-business lending platform, rebuildingsociety.com, who gives us an update on peer-to-business (P2B) lending and why now is the right time to experiment with the market…
Like all good ideas though, it is evolving to meet the needs of seasoned investors and institutions, by providing a regular, reliable return at very attractive rates.
In the US, institutional involvement came early, with several major players creating portfolios with the larger providers; Lending Club and Prosper. These loans are to US consumers and net returns through Lending Club are typically in the 9-12 per cent bracket with over $220 million in interest paid to investors so far.
In the UK by contrast, a more cautious approach has been adopted by the personal loan frontrunners, who offer returns ranging from just below inflation to 6 per cent. These borrowers are required to have very high credit scores; as such the default rates are tiny. Zopa and Ratesetter both have rainy day funds, which compensate lenders when defaults arise.
The area of the market that will appeal most to experienced investors though is lending to businesses.
This rapidly growing asset class offers returns more than double those of the personal loan providers. The usual rules apply for diversifying portfolios, but as default rates remain low (less than 1 per cent in the industry and forecast to rise to 3 per cent) and regulation set to impact the cost base of the platforms, now is the time to experiment with a portfolio.
There’s liquidity in the market too, with the option to buy a performing portfolio. The major players all have secondary markets which allow lenders to trade loans at a premium, effectively creating a micro stock exchange.
Nesta, the research institute, estimates the market to be worth up to £12 billion a year in the future, enough to plug a sizeable gap in the SME funding market. Further diversification will follow, with platforms catering for niche areas of the market, like media companies or fintech, or geographical locations – this already happens with Folk2Folk, a company arranging loans locally in Devon and Cornwall.
Appetite to lend is rising all the time, with Liberum Capital Partners looking to invest £200 million across platforms in the UK and US, while rebuildingsociety.com’s own research indicates as many as one in four consumers would be willing to lend to UK businesses.
The biggest barrier to peer-to-business lending at the moment is a general lack of consumer awareness. When the industry becomes regulated in April 2014, this will inevitably rise. Until then, it’s a bit of a hidden gem.
Those in the know have made annual returns of over 15 per cent, while those who can effectively trade their loans within a month at a 3 per cent premium are doing even better.
As an industry, peer-to-business lending realises data will determine its success among investors. Huge strides are being made here to generate meaningful statistics from relatively young data with transparency a huge aspect of the industry’s DNA.
It’s a marriage of the oldest principles in economics mobilised by the internet and a growing resentment with high street institutions. If you haven’t looked already at peer-to-business lending, now might be the time to do so.
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