Corporate Finance: 2015 signals further growth in Peer to Peer lending

The recent news that the RBS, Britain’s biggest lender to small businesses, are to begin directing certain rejected corporate loan applicants towards alternative finance providers such as peer-to-peer (P2P) funders, indicates that the recent growth in the P2P sector is set to continue.

P2P lending, where a group of investors lend to a business via a regulated online platform which acts as an intermediary, matching borrowers with investors with the objective of eliminating the involvement of traditional financial institutions, has experienced significant growth in recent years. The market in the UK was estimated to be worth £1.7 billion in 2014, an increase of 161% from 2013, and is forecast to grow significantly in 2015 as SMEs increasingly look for funding outside of the traditional sources of finance.

As advisors to a wide range of SME businesses, DTE Corporate Finance are seeing a marked increase in clients looking to learn more about P2P lending and the advantages and disadvantages in seeking this type of alternative finance.

In broad terms, the benefits of P2P include:

• Alternative source of funding if the business is deemed too high risk for a bank. This may be due to a bad credit rating, a bank’s over exposure in a specific sector, lack of security or where earnings are not sufficiently robust.
• Significantly reduced timescale for raising finance compared to a bank. The P2P lending process can be completed within two weeks.
• Flexible loan repayment terms and the option to borrow on an unsecured basis, without personal guarantees from the borrower.
Despite the obvious benefits of P2P finance, there are also a number of important points to consider:

• Interest rates are submitted by investors in a reverse auction process; these typically start at 6% but on average will range between 9%-13% depending on the investor’s assessment of the credit worthiness of the business. This cost of finance is above a standard bank loan.
• There is a risk that the quicker application process and less onerous security requirements could leave companies burdened with debt which they cannot afford to repay.
• Companies are generally expected to have a good credit history and at least two years accounts which demonstrate that the business is profit making.
• Borrowers who submit a good application, over and above the required financial data, such as a business plan and who respond quickly to lenders’ questions, are more likely to receive a good interest rate.
If you are considering the suitability of P2P borrowing for your business, we would be happy to speak with you to discuss your options and also talk you through the different sources of P2P funding available in the market.

To arrange an informal chat, please contact a member of the DTE Corporate Finance team on 0161 819 1910.