It’s not just nature that hates a vacuum, so does the world of finance. Following the credit crunch, mainstream banks radically cut business lending to rebuild capital reserves. Small to medium-sized enterprises (SMEs) were particularly hard hit and, at the time, timber SMEs told TTJ that they were finding the banks especially unresponsive. Some even felt the sector was blacklisted because of its dependence on depressed construction.

Five years on, the UK may be finally emerging from recession, but latest figures show bank business funding still contracting. The good news is that alternative sources of finance, many specifically geared to the needs of SMEs, have emerged to fill the gap. And among these, peer-to-peer (p2p) and crowd lenders are arguably the most successful (with the two operating similarly, but the former offering mainly general business funding, the latter more equity investment). They still account for only 1% of UK SME lending, but growth is rapid.

Finance matchmaking
"Since the banking collapse, the total of p2p lenders has grown from around 10 to about 100," said Andrew Holgate of specialist Assetz Capital. "This year they will lend £700-800m." In broad terms, these operations offer, as one put it, "finance matchmaking", facilitating independent investor lending to individual borrowers. They are typically lean and online oriented and consequently, they say, able to move quickly on loans.

The biggest player in the sector is Funding Circle, which in three years has lent more than £165m to 3,000 businesses.

"We launched because of two key problems," said head of communications David de Koning. "Banks were starving business of cash, while investors were getting a poor return. The answer seemed simple; make it possible for people to earn a better rate by lending direct to businesses that are fizzing with ambition, but can’t get funding."

Businesses, he explained, initially submit online applications to Funding Circle (www.fundingcircle.com), which checks their credit worthiness, much as a bank would do.

"They must have a minimum £100,000 turnover, two years’ formally prepared accounts and no outstanding County Court Judgments over £250," said Mr de Koning. Businesses can borrow £5,000-1m and use the cash for working or expansion capital, asset finance or one-off expenses. Once approved, the loan request is posted in one of five risk bands on Funding Circle’s online market place, where around 25,000 investors choose which borrower or risk category they want to back. They include individuals – who are encouraged to spread loans of as little as £2,000 equally over at least 100 borrowers – but also now local authorities and a university.

"We also secured £20m under the government Business Bank’s Business Finance Partnership (BFP)," said Mr de Koning. "So far we’ve lent £15m, with the government funds making up 10% of every loan on our market place."

Each p2p loan is amassed by investors bidding amounts towards it at their chosen interest rate, with the lowest automatically winning out to give the best final deal.

"On an unsecured loan, borrowers receive money in two to three days or, on secured or large asset finance loans, we’ll set up payment arrangements to the borrower or supplier," said Mr de Koning.

Funding Circle loans are generally taken for six months to five years.

"Borrowers typically pay 6-14%, depending on risk band," said Mr de Koning. "That includes loan interest and our arrangement fees. There are no hidden extras, and you can repay early at no extra cost."

Timber interest
In terms of business sector, the most numerous Funding Circle borrowers are from retail, engineering, manufacturing, business support and construction, including building products suppliers such as timber companies.

"We’ve had several timber clients to date, borrowing from £20,000-70,000," said Mr de Koning.

Assetz Capital is the new kid on the p2p block, launching earlier this year, but is now the fastest growing. It has also made the UK’s largest p2p loan of £1.5m.

It has not yet worked with timber businesses, but Mr Holgate knows the industry well from his days in RBS international trade division, and is keen to hear from the sector, including importers which, he said, banks have been particularly wary of in the downturn.

"We appreciate that timber may have been a high-risk lending market, due to the state of construction. But even in high-risk segments, there are well-managed businesses and, if we’re satisfied they’re viable, have the security and the loan is affordable, we will lend." Assetz, which deals direct with borrowers and brokers, is less online oriented than some p2p operators.

"Besides checking the accounts, projections and so on, we may also visit customers," said Mr Holgate. "In the case of a timber company, we might find it useful to see the yard and assess if the borrowing makes sense. For instance, if it wanted £50,000 for a new bandsaw and was under-utilising the ones it already had, we might ask why they need it!"

The company has taken as little as a week to make a loan, added Mr Holgate, but typically the process takes about two months and loan periods range from five weeks to five years. It charges an average 3% arrangement fee and, like other p2p lenders, its interest rates are "relatively high" at around 12%, but it says this is because it takes on higher risks.

Assetz’s customers turn over up to £50m, but are mainly sub-£10m and loans generally start at £50,000. Its 60,000 or so investors are principally high net worth individuals, but also include smaller ‘retail investors’, businesses and pension funds. It too expects to get BFP cash from government soon.

Investors select the loans they want to support online and can ask further questions about the business they’re backing. P2p funders, said Mr Holgate, essentially work as "banks did 400 years ago".

"It’s ordinary people putting money into businesses without the complex mediation and leveraging developed in mainstream banking," he said. "It’s a simpler model; a pound comes in as investment, a pound goes out as a loan."

Online platform
MarketInvoice offers another model – an online platform for SMEs to sell invoices.

"We launched to provide a solution to the perfect storm SMEs found themselves in after the financial crisis, with banks reluctant to lend and large corporate debtors taking longer to pay," said Ari Last, head of partnership development. "We offer a service that lets businesses quickly and flexibly unlock working capital tied up in long-date invoices. It’s a new solution for SMEs."

MarketInvoice users cover a wide range of sectors, turn over £250,000-50m and to date have sought funding on invoices of £5,000-1m – the proviso being that these are issued to blue chip debtors, ie government, plcs or private companies with turnovers of £30m-plus.

"This is because we don’t take personal guarantees or debentures, so high quality debt is key to de-risking the proposition for our invoice buyers on the platform," said Mr Last.

Its investors/invoice buyers are wealthy individuals, family offices, asset managers and hedge funds, and it is also distributing £40m of government funding through the BFP.

Businesses register free online to use MarketInvoice (management accounts and three months’ bank statements are required) before loading up suitable invoices ready for sale. The investor pool then bids to fund their invoice or invoices, again with the most competitive rate winning out.

"There’s 100% certainty of funding for businesses using MarketInvoice. Every invoice listed on our site has been bought, usually within minutes," said Mr Last. "And funds are typically advanced within 24 hours."

Once the debtor pays the MarketInvoice user, they repay the advanced funds, plus a small ‘service fee’ to the investors. Users are selling invoices with a 50-day payback and generally pay a total fee of 2.5% of the face value.

"That compares with 6-8% for other spot factoring providers," said Mr Last. "And crucially with us, customers know exactly what they’re going to pay before they sell an invoice. It’s completely transparent."

MarketInvoice, he added, has handled £85m of invoices since launching two-and-a-half years ago and its monthly volume is now over £10m. The biggest single invoice sold to date has been £1m, but there is no fixed upper limit.

Long-term appeal
Even if banks now relax their lending policy, Mr Last sees demand for MarketInvoice’s service, and that of other alternative, p2p and crowd funders, continuing to grow due to their "speed, flexibility, ease of use and levels of transparency being so far ahead of what traditional providers can offer".

Mr de Koning agreed: "Peer-to-peer lending has not only filled a void for small businesses, we’re now better at ensuring finance flows to those that need it."

Mr Holgate also believes new regulation of the p2p sector next April, when it comes under the remit of the Financial Conduct Authority, will trigger even faster growth.

"This will boost confidence and attract new investors," he said. "We’ll never be bigger than the banks, but we will be seen as increasingly credible alternative lenders."

P2P – how it adds up

  • £2.3bn – cut in UK bank business lending May-July (Bank of England (BoE) report).
  • £600m – reduction in SME lending April-June (BoE).
  • 4% – EY Item Club forecast for 2013 bank business lending reduction.
  • 500% – Ernst & Young three-year p2p lending growth forecast.

Credit Choice
Smaller banks are also aiming to challenge the big five in backing SMEs, according to a recent Sunday Times report. Among them are Aldermore, Metro Bank and Shawbrook. The latter says it has now topped £1bn in lending, with £766m going to SMEs.

"We’re seeing significant demand from creditworthy small businesses struggling to secure credit from the high street," said chief executive Ian Henderson.

He added that the shortage of bank support was also tempting businesses to use "riskier, more expensive forms of credit".