For those who watch the world of alternative finance, the past few weeks have hugely strengthened the view that this industry – a growing wave of non-bank organisations from start-ups to listed PLCs that provide debt and equity to small businesses – is approaching an inflection point. December saw two big announcements, both of which will bring alternative finance further into the mainstream, helping to speed its growth and reinforce its credibility.
First, it emerged that peer-to-peer lending will be formally regulated from April 2014 by the Financial Conduct Authority, which will take over much of the work of the Financial Services Authority later this year. Then a few days later, the government announced the first four alternative finance providers to receive funds from the public purse to boost their lending firepower, as part of the Business Finance Partnership.
A more detailed anaysis of the decision to regulate the alternative lenders will follow soon but before that a look at the payouts by the Business Finance Partnership. The four companies to secure funding in the first round were: Funding Circle (£20m to lend to small companies), Zopa (£10m to lend to sole traders), Boost&Co (£20m to make loans of £1m-£8m to UK SMEs) and Credit Asset Management (£5m to fund leasing and loans to borrowers in the professions). In each case, the sum the government puts in will have to be matched by money from private-sector lenders, enabling ministers to say they are in fact making an extra £110m of lending available to SMEs and the self-employed in the UK.
Although compared to the more-than £100bn stock of bank lending to SMEs these awards are small, they nonetheless represent a big deal for the industry – given that total lending to SMEs by the entire alternative finance movement is probably no more than £150m or so, an extra £55m of lending capital should deliver a powerful stimulus indeed. And for leading peer-to-peer lenders such as Funding Circle and Zopa the awards mark a breakthrough in terms of public credibility and a priceless implicit endorsement of their lending model. After all, these platforms’ core lenders are private individuals using their personal savings, so the ability to say they have passed the test to attract public money will do them nothing but good.
And there will shortly be more to come. The December announcement by The Department of Business, Innovation and Skills represents only the first £55m out of a total of £100m earmarked under the Business Finance Partnership to help accelerate the growth of the alternative finance sector. BIS says it will announce the next round of recipients early this year, once its due diligence on the winners is complete, so we can expect to hear about further awards shortly.
The roots of this exercise go back to early 2012 and the taskforce set up under Tim Breedon, former CEO of Legal & General, to look at Boosting Finance Options for Business. Among Breedon’s recommendations was for government to use part of the £1.2bn set aside for the Business Finance Partnership to encourage the growth of alternative finance providers such as P2P lenders, mezzanine loan funds and online receivables exchanges.
This idea was picked up immediately by the government and announced as part of the March Budget, with a request for proposals following soon afterwards. The four awards announced in December are the first fruits of that process. There’s no doubt the money from the BFP will make a big difference to those companies that succeed in winning a share of it, but it’s also clear that Capital for Enterprise, the state-owned investment manager that ran the application process, found it challenging to invest such a large sum of money in an industry that is still so young, although growing very quickly.
Since it opened in August 2010, the biggest winner, Funding Circle, has to date lent just under £70m – so another £40m of lending capacity is a big step up by any standards. The challenge for these platforms will be to manage the balance between borrowers and lenders as their businesses rapidly scale up, so that the weight of money available to lend doesn’t drive down borrowing rates too far. A challenge, for sure, but for the P2P industry that’s a nice problem to have, and for businesses looking for new places to borrow it also looks like an increasingly attractive option.