In many respects, platform lending has been accepted into the corporate finance mainstream. Witness the latest report from the Cambridge Centre for Alternative Finance. Crunching the numbers for 2017, the Centre found that around 40% of loans advanced to businesses through P2P platforms were funded by institutions, including mutual and pension funds.
It’s a finding that highlights just how far the platform lending market has travelled in less than a decade. Institutions do not invest money lightly. Their willingness to channel money into the Peer to Peer (P2P) market represents – if one were needed – a validation of the business model. As the institutions see it, P2P and other platform lenders are playing an increasingly important role in backing SMEs and that in turn is creating opportunities for investors. It’s a virtuous circle that will help to ensure that platforms can continue to meet the funding requirements of small companies.
On the demand side, the picture is somewhat mixed. Evidence from bodies such as the Cambridge Centre, Nesta and the British Business Bank acknowledge that business awareness of alternative lenders continues to grow. But as the latest British Business Bank report reveals, that awareness is patchy. Broadly speaking, there is a geographical divide. Small companies in London and the South East are more likely to be aware of (and use) alternative lenders than many of their counterparts in the regions.
Beyond the Basics
So, there is still educational work to do. And a working awareness of alternative lenders is about more than simply knowing that P2P platforms exist. Just as the wider lending market hosts a broad range of specialist debt providers, so does the smaller but increasingly important universe of platform providers
So what does that mean in practice?
Well, the first thing to remember is that the catch-all term “P2P” lending does not capture everything that is happening in the market.
The term P2P tends to conjure up a picture of a business model that can be easily applied to both the personal and business loans market. Put simply, a P2P platform brings together a community of investors who are prepared to pool their cash and lend to individuals or companies over a fixed term. This description covers off a large segment of the marketplace, but it is not the whole picture.
For one thing, not everybody wants or needs a term loan. A business that needs to buy equipment such as computers might see a term loan as the way forward, but it doesn’t represent the kind of flexible solution required to manage the cash flow gap that late payments by customers can create.
In the traditional finance market, that gap could be filled by an overdraft or – more effectively in some cases – by factoring, invoice finance or trade finance.
So perhaps not surprisingly, platform lenders are also providing cash management solutions. A case in point is invoice trading. Companies wishing to borrow against an invoice, invite bids from lenders on a platform.
The platform lending market also has its sector specialists. For instance, property is a particularly popular market, not least because loans can be secured against the value of real estate assets. Thus, if a small developer needs funds to buy and/or develop a small block of flats, property platforms provide an alternative to traditional specialist lenders.
In other words, small businesses and entrepreneurs are not looking at a plain vanilla platform model. Platform providers offer a range of solutions, tailored to requirements and circumstances.
Not All Investors Are The Same
However, it’s also important to remember that specialist platforms – to a greater or lesser extent – rely on lenders who understand the concepts, business models and the risks of the borrowers. And not all investor communities are the same.
To take an example, a generalist P2P site probably has a mix of ordinary retail investors, perhaps a few High Net Worth individuals and some institutional backing. It is essentially crowdfunding.
But that will not suit every situation. An alternative is a Private Debt Platform (PDP), with funding provided by a much smaller community of High Net Worth or sophisticated investors. The individuals comprising this smaller pool will typically invest more than retail investors, and they may well be looking for a different kind of opportunity.
So why is this important? Well, in the case of The Route – Finance’s Private Debt Platform, investors are looking for superior returns and they are also experienced in assessing opportunities. This is a community that has coalesced around The Route’s focus on special situations lending, serving companies with requirements that fall outside the normal lending criteria of banks and more generalist P2P platforms. The Route’s investors also pre-mandate funds, ensuring that capital is available. The Route’s own research suggests that as the Alternative Finance market evolves, more platforms are adopting the PDP model to serve specialist markets.
The emergence of specialist platforms creates a slightly more complex Alternative Finance marketplace, but it is ultimately means that platforms are serving a very broad range of business and entrepreneur needs.