‘Peer-to-peer lending’. These days it’s a term that is familiar to just about everyone with an interest in SME finance. Widely covered in the press and now broadly recognised by brokers and advisers as an option that should be considered when businesses need to borrow, Peer-to-Peer debt solutions are, arguably, no longer ‘alternative’ but part of the corporate finance mainstream.
But while it trips off the tongues of advisers, brokers, journalists and business owners alike, ‘peer to peer lending’ is an expression that is often used rather lazily as a catch-all to describe an increasingly diverse, platform-based debt marketplace.
The Birth Of Lending Platforms
Peer-to-peer lending as we know it today really arrived in the UK about five years ago with the launch of Funding Circle. It was a concept that had its roots in two particular corners of the digital and e-commerce marketplace. On the one hand, it bore many similarities to ‘rewards’ and ‘equity’ crowdfunding in that money was being sourced, not from one or two institutions, but from a distributed and diverse community of lenders. These lenders were not necessarily wealthy, but they did have money saved and they wanted to put it to work. Equally, you could argue that peer-to-peer pending is part of the ‘collaborative’ or ‘sharing’ economy, with platforms enabling lenders to earn money from assets – in this case cash that would otherwise languish in low interest bank accounts.
Making a Market
In fact it would probably be equally as accurate to describe peer-to-peer lending a part of the ‘platform’ economy.
The role of the online platform is generally to make a market by connecting buyers with sellers – or in this case a debt platform, to match lenders with borrowers. Those lenders don’t necessarily have to be people who might be classified by banks as ‘retail customers’. They can also be – as is increasingly the case – institutions or High Net Worth individuals (HNWs)
Equally, a debt market doesn’t have to operate on a ‘peer-to-peer’ basis. In some cases, it will be advantageous for a small business owner to borrow, not from a broad community of peers, but from a much smaller and more concentrated group of professional investors – High Net Worth individuals who understand business and all the risks associated with investment.
The Private Debt Platform Solution
That is the model operated by The Route – Finance. Rather than creating a peer-to-peer lending/borrowing solution, The Route has opted for a ‘Private Debt Platform’, with all the finance supplied by sophisticated investors.
At one level, The Route – Finance’s Private Debt Platform does something very similar to its peer-to-peer lending counterparts, in that it exists to channel money to SMEs while giving its investors a return.
But the differences are significant. The financial requirements of SME businesses vary enormously. Some need money to increase capacity ahead of taking on new customers. Others could be seeking finance to fund the manufacture of a new product. And another group may need some kind of facility to plug the cash-flow gap that often opens up when goods or services are supplied on the basis that the bill will be paid one, two or three months after an invoice is sent. Inevitably, the nature of the company’s requirement will direct managers towards a specific debt solution. Meanwhile, from the point of view of a lender, the individual circumstances of a business will dictate whether or not a loan is considered safe or risky, or somewhere on a spectrum in between.
In many cases, the requirements of the business may not lend themselves to an easy assessment of risk by everyday investors.
For instance, a young company might be seeking capital to make a major equipment purchase with a view to ramping up production ahead of an expansion into a new geographical market. The business has researched the market and is basing its application on an expectation that a certain amount of demand exists but there is, as yet, no proof in terms of revenues. For ordinary platform lenders, assessing whether or not this venture is viable is bound to be difficult if not impossible.
But for sophisticated investors, special situations offer an opportunity to support SMEs at crucial stages of their development while also making higher than average returns. The key is that the investors – and in the case of The Route – Finance – the platform operators have the skill and experience to identify companies who are seeking capital to support genuinely viable business plans. Those might be good companies undergoing temporary financial stress, or ambitious businesses set on ramping up growth. The key to understanding viability is skilled due diligence.
That’s why a Private Debt Platform is different. By building a community of sophisticated lenders, The Route – Finance is focused on sourcing ‘special situations’ finance.
The Alternative Finance universe offers solutions for businesses across a range of circumstances and no two providers are the same. To help brokers and businesses identify appropriate providers, The Route – Finance has published The Alternative Finance Guide 2017. Download here >>.