P2P business lending: Entering into a ‘new normal’
The business lending sector has not been operating in “normal” conditions for some time. Michael Lloyd explores the use of personal guarantees and emerging opportunities in a challenging economic environment…
Peer-to-peer business lending conditions have not been ‘normal’ for some time. Over the past two years, state-backed Covid lending schemes have completely changed the business finance landscape and distorted the marketplace somewhat, with unaccredited lenders unable to compete against the low rates on offer.
When the recovery loan scheme (RLS) ended on 30 June, business lenders would be forgiven for expecting a return to pre-pandemic conditions. But the year is 2022, and normal is a nice memory.
Mid-way through the year, war has gripped Ukraine, the annual inflation rate has hit a 40-year high, the base rate has reached a 13-year high, and the Bank of England has predicted an imminent recession. There will be no return to the halcyon days of 2019. Instead, the alternative lending sector is heading into what we could call a ‘new normal’.
As the economy contracts and the RLS ends, a successor scheme will continue to support small businesses. According to reports, the £3bn scheme will offer loans of up to £2m to small- and medium-sized enterprises (SMEs), backed by a 70 per cent government guarantee, but unlike its predecessors, it will require personal guarantees (PGs) from borrowers.
Many P2P platforms already ask for security or PGs, but these are likely to become increasingly important as they become more careful about their lending.
Nicola Horlick, chief executive of Money&Co, says that her platform sometimes asks for PGs from borrowers, but it depends on their financial position, as “there is no point” in taking a PG from someone who will never be able to honour it. She also highlights that the platform prefers security.
“We much prefer to have specific assets to secure on rather than relying on a personal guarantee as this is likely to be better for our lenders,” Horlick says.
Ben Shaw, chief executive of HNW Lending, says although his platform is already conducting asset-backed lending, it has always required PGs too.
“A PG makes most people think a lot harder about whether they will actually be able to repay the loan,” he says.
Neil Faulkner, managing director of P2P ratings and research firm 4th Way, says although there is little data on the impact of PGs on loan performance, they can bring the benefit of encouraging borrowers not to default.
“Since few lenders offer businesses loans without guarantees, there’s little downside to P2P lending platforms that require them, since they won’t be outcompeted by more attractive terms,” he says.
“Anecdotally, the greatest impact of guarantees is probably that they encourage directors not to default on their debts in the first place.”
JustUs chief executive Lee Birkett says that his platform only requires PGs for borrowers it has not worked with before, and for deals with a high risk profile.
Read more: Special report on government lending schemes
He goes on to say these will become more important in the sector, but only if they are underpinned by assets.
“P2P platforms will be asking for PGs now if they’re a responsible lending platform and the loan isn’t backed by security,” Birkett says.
“They only have a benefit if there are assets behind the PG, it’s not worth the paper it’s written on if there are no assets behind it.”
Assetz Capital – the largest P2P platform in the UK – generally requires PGs to protect investors’ capital, prevent fraud and ensure the safe recovery of loans. Chief executive Stuart Law says that the platform may participate in the RLS successor scheme, even if it comes with mandatory personal guarantees.
“We are reviewing the RLS successor and will make a decision on that in due course,” Law says.
“We were a significant lender in the pandemic both through RLS and [its predecessor] the coronavirus business interruption loan scheme, providing hundreds of millions to SMEs that needed it at one of the most challenging times for businesses in modern history.
“In line with our focus on supporting UK SMEs, we will continue to look at opportunities to work with public sector partners, but our main focus must naturally return to business-as-usual lending to support UK businesses through both our P2P lending platform and wider institutional funding.”
If P2P lenders wish to take part in the RLS successor scheme, they will have to get to grips with the intricacies of PG-backed loans. Several platforms have previously highlighted problems with borrowers who have given PGs to different lenders with different loans at the same time.
ChargeCheck – a global register for sureties, charges and guarantees – is working to change this with its plans to introduce a PG register for lenders, including P2P platforms. It is hoped that the new PG register will be launched within a few months.
“At the moment you’re able to take out as many PGs as you like and other than a borrower disclosing this, there’s no way of checking,” says Tom Spanner, chief executive of ChargeCheck.
Read more: SMEs could face obstacles to rumoured new government loan scheme
“We’re trying to provide somewhere to check. We’ve been working with industry leaders, banks, regulators and insolvency practitioners all to build the product to their specification.”
In the aftermath of the government loan schemes and the cost-of-living crisis and inflation, platforms find themselves operating in a challenging business lending environment.
But Assetz’ Law says that despite these challenges, businesses still need to be supported.
“We are undoubtedly in very challenging economic times, with a very real possibility of a recession, whether modest or otherwise,” Law says.
“Across public policy and the lending market, we need to do all we can to support businesses and promote a thriving economy.”
P2P business lending platforms are being careful in their lending, focusing on due diligence, security and PGs.
And some, like Money&Co, are looking elsewhere to specialist niche sectors. Ahead of an expected recession, Horlick says that her platform is being very cautious when making lending decisions and is continuing to work on litigation funding and music loans which will be unaffected by a downturn.
She says the platform is looking at how lending in the agricultural sector might work and expects to enter this market within the next 12 to 18 months.
“It is very difficult for tenant farmers to borrow from banks,” Horlick says.
“They can offer security and they deserve to be able to borrow.”
It has been well documented that the government-backed lending schemes distorted the P2P and alternative lending marketplace, however, according to platforms and industry stakeholders this distortion is now fading. A new form of normality is returning, marred by challenging economic conditions.
“The ship is holding fairly steady with stormy waters,” says Law. “There is the collapse of supply chains, the reversal of globalisation, the Ukraine war, but the economy seems to be weathering those storms and carrying on regardless.”
As some sense of normality returns, P2P business lending platforms have been reporting good pipelines of deals and opportunities.
“At the beginning of the year we weren’t seeing enough deals that warranted putting investor money in, we thought the risks were too high, but we’re now seeing more deals we want investors to put their money into,” says HNW Lending’s Shaw.
“With what we have got in the pipeline I’m optimistic we will provide a lot of good loans for our lenders, and I think we will have a decent performance out of those loans.”
Charlotte Marsh, managing director of ArchOver, says that her business lending platform saw a “strong start” to the year, followed by a quieter period due to the nature of opportunities that it is working on.
“We should start to see larger projects reaching the platform in the coming weeks,” she says.
“We have received a positive uplift in enquiries relating to management buyouts and acquisitions. Our team is managing a strong pipeline of opportunities and as these are largely transactional, completion can take some time.”
P2P business lending platforms expect the sector to grow its volumes as banks pull back their lending.
Law says this presents a huge opportunity for P2P and describes the future of the P2P business lending sector over the next few years as “very positive”.
Read more: Personal guarantee-backed loans rise as businesses battle rising costs
“We anticipate demand to continue to grow for P2P and other alternative finance solutions given the current climate and the fact the banks are clearly pulling back their support according to Bank of England data,” he says.
“All this chaos gives opportunity for more nimble lenders to take market share. I think every time the banks step back it’s quite difficult for them to step forward and take back what was lost.”
The P2P business lending sector is returning to a ‘new normal’. Market distortion is ending, and new opportunities are emerging, but wider economic challenges remain.
P2P platforms are well placed to weather the coming storm, with a strong track record of cautious lending, and an emphasis on security, whether via asset-backed lending, PGs, or a combination of both.
The ‘new normal’ is shaping up to be a very interesting place, with P2P platforms poised to take more business away from banks, and business borrowers able to take advantage of the flexibility and accessibility that only P2P can offer.