Over the past few months, the rate at which money is flowing towards crowdfunding platforms has accelerated noticeably. This could be a temporary blip – one of the regular swings between excess supply and demand that you’d expect to see in markets such as these that are growing very rapidly. But the forces driving this cash towards the lending platforms, both consumer and business sites, are powerful and it looks as though they will continue to hold sway for some time.
As a growing quantity of money becomes available for lending, interest rates on sites that use competitive auctions – where lenders compete to offer funding to borrowers – will tend to decline unless the number of borrowers grows and/or the size of loan goes up. This is happening, to some degree at least. FundingCircle recently listed its largest ever individual loan request, for example, at £525,000, and its loan book continues to grow very quickly, as does that of its main rival, ThinCats. But in spite of the sites’ efforts to originate more and larger loan requests, the pressure on interest rates continues to build.
For businesses, this is excellent news. Rates, particularly on smaller loans, are now very competitive indeed compared with what banks can offer and so the market is starting to work better from a borrower’s perspective.
There are several reasons why more money is becoming available to lend on these platforms and rates are therefore trending lower. The first, of course, is growing awareness of P2P lending among the retail savers who provide most of the lending capacity on these platforms. But alongside that come government policies aimed at speeding the growth of the P2P movement and turning it into a more effective alternative to the banks.
In particular, the government’s Business Finance Partnership has made its first round of awards, including £20m to be channelled into SME loans via Funding Circle over the next two years. That money has just come on stream and, matched by funding from private lenders, it will significantly increase Funding Circle’s lending capacity and should help to keep borrowing rates very keen. Then the Budget brought news of more government money flowing in the direction of the P2P lenders, this time via the planned Business Bank. Bids are to be invited shortly for a share of another £300m, which again will be made available to non-bank funding operations and matched by private money. So it doesn’t look like there will be any shortage of funds to lend in the near future.
But that’s just the deliberate policy moves to boost non-bank finance. A much bigger factor, arguably, is the Bank of England’s Funding for Lending scheme, which promises extremely cheap finance to banks provided they use it to increase lending for mortgages and small businesses. That was the idea, but it looks very much as though something else is happening in practice.
Armed with super-cheap Bank of England funding, banks have effectively given up competing for retail deposits and so interest rates on deposit accounts have tumbled. This leaves savers who want to earn a decent return on their money with even fewer options and there is growing evidence that they are turning to places such as P2P lending platforms in ever increasing numbers. In January, the consumer P2P site RateSetter matched £6.8m of loans, double its previous monthly record. Rhydian Lewis, co-founder and chief executive, told the Financial Reporter website: “A large proportion of our new customers are saying they have chosen to lend peer-to-peer because of interest rates nose-diving since the launch of the Funding for Lending scheme.”
The result is that a policy intended to spur more lending to small businesses via the banking system is instead driving up lending capacity in the non-bank sector. This is good for business borrowers, since cheaper funding is welcome whatever the source. And it is also good for the platforms, since it is helping them expand their share of the lending market by making their borrowing rates increasingly competitive.
Moreover, there could well be more to come, since the Budget also confirmed that the government is looking at putting the Funding for Lending scheme “on steroids”. That may well be partly because of reports filtering in via the Bank of England’s regional agents, who spend their time talking to businesses and bankers, among others.
The agents’ latest report suggests that, for some small businesses at least, bank funding remains hard to get and that this is not likely to change. “The cost of credit had fallen for many companies, though this was yet to generate any material increase in lending,” the agents reported. “Falls in loan pricing would take time to feed through to actual borrowing costs as existing lending was reviewed and re-priced gradually over time. And banking contacts reported that some smaller companies might not see lower costs because lenders were seeking to increase the differentiation of loan pricing across the small and medium-sized enterprise sector. Smaller companies and firms in those sectors perceived to be of higher credit risk were yet to report any material increase in credit availability or in banks’ risk appetite.”
For companies in these sectors, seeking funding from the P2P sites might prove the one of the few remaining options.