The commercial lending industry has not been operating under “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 terms have not been “normal” for some time. In the last couple of years, state-backed Covid loan schemes have completely changed the business finance landscape and somewhat distorted the market, with non-accredited lenders unable to compete with the low rates on offer.
When the recovery lending scheme (RLS) ends on June 30, commercial lenders will be forgiven for hoping for a return to pre-pandemic conditions. But the year is 2022, and normal is a nice memory.
By mid-year, war has gripped Ukraine, the annual inflation rate has hit a 40-year high, the base rate has hit a 13-year high, and the Bank of England has forecast an impending recession. There will be no return to the halcyon days of 2019. Instead, the alternative lending industry is heading toward what we might call a “new normal.”
As the economy contracts and the RLS ends, a successor scheme will continue to support small businesses. The £3bn scheme will reportedly offer loans of up to £2m to small and medium-sized enterprises (SMEs), backed by a 70% government guarantee, but unlike its predecessors, it will require personal guarantees. (PG). of the borrowers.
Many P2P platforms already require security or PG, but these are likely to become more and more important as they become more careful about their lending.
Nicola Horlick, chief executive of Money&Co, says her platform sometimes asks for PG from borrowers, but it depends on their financial standing, as there is “no point” in taking a PG from someone who can never honor it. She also highlights that the platform prefers security.
“We prefer to have specific assets to secure rather than rely on a personal guarantee, as that’s likely to be better for our lenders,” says Horlick.
Ben Shaw, CEO of HNW Lending, says that while his platform is already doing asset-backed lending, it has also always required PG.
“A PG makes most people think a lot more 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 that while there is little data on the impact of GPs on loan performance, they may have the benefit of encouraging borrowers not to default.
“Since few lenders offer unsecured business loans, there are few downsides to P2P lending platforms that require them, as they won’t be outbid by more attractive terms,” he says.
“Anecdotally, the biggest impact of guarantees is probably that they encourage directors not to default on their debts in the first place.”
JustUs CEO Lee Birkett says his platform only requires PG for borrowers it hasn’t worked with before and for deals with a high-risk profile.
Read more: Special Report on Government Loan Schemes
He goes on to say that these will become more important in the sector, but only if they are backed by assets.
“P2P platforms will apply for PG now if they are a responsible lending platform and the loan is not backed by security,” says Birkett.
“They only have benefits if there are assets behind the PG, it is not worth the paper it is written on if there are no assets behind it.”
Assetz Capital, the UK’s largest P2P platform, generally requires PG to protect investors’ capital, prevent fraud and ensure safe recovery of loans. Chief Executive Stuart Law says the platform can participate in the RLS successor scheme, even if it comes with mandatory personal guarantees.
“We are reviewing the successor to RLS and will make a decision on it in due course,” says Law.
“We were a major lender in the pandemic through both RLS and [its predecessor] the coronavirus business interruption loan scheme, which provided hundreds of millions to SMEs in need at one of the most difficult times for businesses in modern history.
“In line with our focus on supporting UK SMEs, we will continue to look for opportunities to work with public sector partners, but our main focus must naturally return to business as usual lending to support UK businesses through our platform. of P2P loans and broader institutional financing”.
If P2P lenders want to participate in the RLS successor scheme, they will have to deal with the complexities of PG-backed loans. Various platforms have previously highlighted problems with borrowers who have PGed different lenders with different loans at the same time.
ChargeCheck, a global registry for bonds, charges and guarantees, is working to change this with its plans to introduce a PG registry for lenders, including P2P platforms. The new PG registry is expected to go live within a few months.
“Right now, you can take out as many PGs as you want, and short of a borrower disclosing it, there’s no way to verify,” says Tom Spanner, CEO of ChargeCheck.
Read more: SMEs could face hurdles in rumored new government loan scheme
“We are trying to provide a place to check. We have been working with industry leaders, banks, regulators and insolvency professionals to build the product to their specifications.”
In the wake of government lending schemes and the cost of living and inflation crisis, the platforms find themselves operating in a challenging commercial lending environment.
But the Law of Assetz says that despite these challenges, companies still need support.
“Without a doubt, we are in very challenging economic times, with a very real possibility of a recession, whether modest or not,” says Law.
“Through public policy and the loan market, we must do everything we can to support businesses and promote a prosperous 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 into other specialized niche sectors. Ahead of an expected recession, Horlick says his platform is being very cautious in making lending decisions and continues to work on litigation financing and music loans that won’t be affected by a recession.
She says that the platform is looking at how lending could work in the agricultural sector and hopes to enter this market within the next 12-18 months.
“It’s very difficult for renters to get loans from banks,” Horlick says.
“They can offer security and they deserve to be able to borrow.”
It has been well documented that government backed lending schemes distorted the alternative and P2P lending market, however according to platforms and industry stakeholders this distortion is now fading. A new form of normalcy is returning, marred by challenging economic conditions.
“The boat stays pretty stable in stormy waters,” says Law. “There is the collapse of supply chains, the reversal of globalization, the Ukraine war, but the economy seems to be weathering those storms and carrying on through it all.”
As some sense of normalcy returns, P2P business lending platforms have reported good flows of deals and opportunities.
“At the beginning of the year we weren’t seeing enough deals that warranted investing investors’ money, we thought the risks were too high, but now we’re seeing more deals that we want investors to put their money into,” says HNW Lending’s. Shaw.
“With what we have in the pipeline, I’m optimistic we’ll provide a lot of good loans for our lenders, and I think we’ll have a decent return on those loans.”
ArchOver CEO Charlotte Marsh says her business lending platform had a “strong start” to the year, followed by a quieter period due to the nature of the opportunities it’s working on.
“We should start to see bigger projects hit the platform in the next few weeks,” he says.
“We have received a positive increase in purchase and acquisition-related inquiries from management. Our team is managing a strong pipeline of opportunities and since these are largely transactional, completion may take some time.”
P2P business lending platforms expect the sector to increase its volumes as banks withdraw their loans.
Law says this presents a huge opportunity for P2P and describes the future of the P2P business lending industry in the coming years as “very positive”.
Read more: Loans backed by personal guarantees increase as companies fight rising costs
“We anticipate that the demand for P2P and other alternative financial solutions will continue to grow given the current climate and the fact that banks are clearly withdrawing their support according to data from the Bank of England,” he says.
“All this chaos gives the most agile lenders an opportunity to grab market share. I think any time the banks step back, it’s quite difficult for them to step forward and get back what was lost.”
The P2P business lending industry is returning to a ‘new normal’. The market distortion is ending and new opportunities are emerging, but broader economic challenges remain.
P2P platforms are well positioned to weather the coming storm, with a strong track record of cautious lending and an emphasis on safety, whether through asset-backed lending, PG, or a combination of the two.
The ‘new normal’ is shaping up to be a very exciting place, with P2P platforms poised to take more business from banks and commercial borrowers able to take advantage of the flexibility and accessibility that only P2P can offer.