It has been two years since government-backed loans were introduced to help business owners access quick finance during the pandemic. But those two years may have created a permanent shift in the peer-to-peer lending landscape, Michael Lloyd discovers…
When the state-backed lending schemes were introduced at the beginning of the Covid crisis, they were seen as an emergency measure, designed to prop up the economy during a time of unprecedented instability.
Two years on, government backed loans have become part of the UK’s lending ecosystem; a first port of call for any small- and medium-sized enterprise (SME) in need of financing.
For alternative business lenders, this has created distortion in the marketplace. There has been a noticeable split between those peer-to-peer business lending platforms which have been authorised to offer state-backed loans during the pandemic, and those which have not.
And while it would be easy to assume that authorised platforms have had the advantage over the past two years, others disagree.
P2P platform Folk2Folk won approval to offer the coronavirus business interruption loan scheme (CBILS) but ultimately decided not to participate, saying it did not want to dilute its focus on retail investors. The state-backed loan schemes can only be funded by institutions.
Folk2Folk also opted not to apply for the follow-on recovery loan scheme (RLS), stating that “we don’t want to distract ourselves in any way or push out retail to one side instead. “We have a loyal retail investor base, so we owe it to them to pay them attention and try to give them what they expect from us.”
Meanwhile, JustUs opted to launch its own small business interruption loan service (SBILS) to provide funding for businesses that missed out on finance under CBILS. Lee Birkett, chief executive and co-founder of JustUs, told Peer2Peer Finance News that this was in response to seeing hundreds of applications from businesses rejected for CBILS.
JustUs made an initial application to participate in CBILS, but Birkett says that the platform was not able to progress with its application because of the requirement for lenders to take a first loss on loans before the government.
“It wasn’t viable for us,” he says. “The schemes required the platforms to take the risks and we couldn’t afford that.”
The state-backed lending schemes sound great on paper.
For CBILS, the government would authorise a series of lenders to distribute funds up to the value of £5m to SMEs via term loans, overdrafts, invoice finance or asset finance.
The lender would get a government-backed guarantee for the loan repayments to encourage more lending, although the borrower always remained fully liable for the debt.
Four P2P lending platforms were accredited to CBILS: Funding Circle, Assetz Capital, LendingCrowd, and Folk2Folk, although Folk2Folk did not go on to lend any funds under the scheme.
The coronavirus large business interruption loan scheme (CLBILS) worked in a similar way, but for loan facilities up to the value of £200m. No P2P lenders were approved to deliver CLBILS.
Meanwhile, the future fund allowed innovative companies to claim government support worth between £125,000 and £5m, subject to at least equal match funding from private investors. Six P2P lenders benefitted from the future fund in the end: CapitalRise, Crowd2Fund, Assetz Capital, JustUs, FutureBricks and Propio.
The most popular government support for businesses was the bounce back loan scheme (BBLS). Under the terms of the BBLS, SMEs could apply for between £2,000 and £50,000. No fees or interest would be paid for the first 12 months, and the interest rate would be capped at 2.5 per cent thereafter.
The government offered a 100 per cent guarantee on all bounce back loans, meaning that the lender would not lose any money in the event of a default. However, just one P2P lender – Funding Circle – won approval to distribute the BBLS, through a partnership with Starling Bank.
The only government lending scheme still in effect today is the RLS, which just Assetz Capital and Funding Circle have been approved to offer. More than £1bn has already been loaned through this scheme, in addition to the £80.4bn of finance that was distributed through CBILS, CLBILS, BBLS and the future fund.
So why have so few P2P lenders participated in these schemes, and what impact have the schemes had on the wider alternative lending market? According to a number of industry stakeholders, the first hurdle was the application process, as administered by the state-owned British Business Bank (BBB).
Stuart Law, chief executive of Assetz Capital, says the BBB approval process is “very detailed”. He says that the platform’s strategy was always to work with the state development bank and even lobbied for housebuilding to be added to CBILS.
“It takes a long time to go through the process,” he says.
“They look for absolutely everything, what you lend on, the security you take, how you lend, the experience and track record and how you approach the sectors you support.
“It’s very detailed and particularly difficult if you haven’t had a relationship with the BBB before. We already did.”
One accredited lender, speaking on condition of anonymity, told Peer2Peer Finance News that the approval process took longer than they would have liked, but appreciates that the government and BBB were “under considerable pressure to accredit as many lenders” as quickly as possible and did the best they could.
However, another said the process was “very efficient” with a “helpful” BBB team. Starling Bank says it was able to deploy a huge amount of CBILS funding quickly through Funding Circle due to the P2P platform’s “established presence in lending to the parts of the SME market where CBILS is relevant”.
Assetz Capital’s Law also points out the benefits of offering CBILS as a long-standing SME lender. He believes that the existence of CBILS allowed housebuilding to continue during the darkest days of the pandemic and meant that the platform could keep lending without worrying about “when the pandemic would slow down to allow building sites to reopen”.
“CBILS helped housing supply continue,” Law says.
“We carried on lending in the same way, looking for and funding sensible housing projects with the same criteria and credit quality.”
However, one unintended consequence of the Covid lending schemes was that they created a distorted SME lending market.
While some P2P platforms participated in the schemes, those that did not participate struggled to compete against their low rates.
Both Crowd2Fund and Rebuildingsociety have spoken of the challenge of competing with CBILS loans, while LendingCrowd, which participated in CBILS but not the RLS, has previously said the latest scheme played a part in its decision to remain closed to retail lenders.
Similarly, since the state-backed lending schemes were introduced, Funding Circle has been closed to retail investors for the first time in its 12-year history.
A Funding Circle spokesperson recently told Peer2Peer Finance News that it would not review its retail lending business until all state-backed lending schemes have come to a close at the end of June 2022.
Nicola Horlick, chief executive of Money&Co, says that her platform has adapted to focus on deal-led loans and lending against music rights and litigation funding because it has become more difficult to find good quality companies that need to borrow via a P2P platform.
“There are lots of government backed loans currently and this means that those SMEs that don’t have one are generally not suitable for us to lend to,” she says.
“That’s why we are focused on SMEs looking to make acquisitions or fund management buyouts.”
Ian Anderson, chief operating officer of ArchOver, says that his P2P platform was forced to adapt and to some extent specialise” in its lending but is seeing strong demand.
“There is no doubt the state schemes have created an unlevel playing field and will probably continue to do so for some time,” he says.
The true impact of the government lending schemes is only just becoming apparent.
“Putting £80bn into UK businesses is an awful lot of money and is fantastic, but the downside is how much of that money will ever come back?” says Adam Tyler, executive chairman at the Financial Intermediary and Broker Association.
“CBILS had tighter criteria and checks than BBLS. As the schemes matured it became harder to get a BBLS loan and became more difficult to get a CBILS loan towards the end when the allocations some lenders had were running out.”
As we enter the final months of the state-backed lending schemes, we can start to see the impact of two years of government loans.
Lenders expect to see rising defaults in the year ahead, as inflation and supply chain issues make it harder for small business owners to meet their payments. The first fraud calculations are beginning to emerge too.
The Treasury recently confirmed that £5.8bn has been lost to fraudsters exploiting government grants and loan schemes during the pandemic. The government only expects to recover £1 of every £4 stolen from the public purse, writing off a massive £4.3bn. Analysts have blamed these issues on the speed at which government funding was distributed in the early months of the pandemic, which significantly reduced the amount of due diligence being done on prospective borrowers.
However, P2P lending platforms pride themselves on their thorough due diligence, and they are expected to see lower defaults and fewer instances of fraud. Their inclusion in the state-backed lending schemes – however limited – could help to shine a light on the efficiency and strength of the P2P sector. There are already signs that government bodies are working more closely with P2P lenders since the start of the pandemic.
In November, Folk2Folk secured a £7m commitment from British Business Investments and in December, the BBB became a minority shareholder in JustUs, in a transaction which values the platform at £50m.
“The future will be more government money into P2P platforms co-lending alongside the crowd,” predicts Birkett.
Despite the difficulty of the authorisation process and a shortage of high-quality SME loans, the state backed lending schemes could ultimately be considered a success for P2P.
These schemes have made household names of some P2P brands, and inspired others to offer similar types of products to their borrower base. They have given platforms an opportunity to show off their due diligence processes, and to scale up their lending; while making valuable connections at the BBB and other government agencies.
As normal lending conditions return, the lessons of the state backed lending years can help propel P2P platforms into a new era of lending, while delivering more choice and better deals for retail borrowers and lenders alike.