Risk averse P2P lending is not a contradiction in terms

The NACFB is pleased to note an important change to its Professional Indemnity Insurance product. After a lot of work with Towergate Insurance and Funding Circle, the NACFB’s members can now arrange an unrestricted number of commercial loans with peer-to-peer lenders without jeopardising their insurance cover.

Related topics:  Commercial,  Commercial finance
Rob Lankey | CEO - NACFB
5th April 2017
rob lankey nacfb

Under the terms of the trade body’s membership, NACFB brokers must have professional indemnity insurance which covers them against claims of mis-selling from clients. Until March, however, insurance companies had restricted the amount of business commercial finance brokers could place with peer-to-peer lenders for their cover to stay valid.

To create a fictitious example, let’s imagine a company called FundPopulus. Insurers have not had time to really get to know FundPopulus, so they don’t feel comfortable about guaranteeing the quality of the third party’s behaviour. And FundPopulus suffers from this wariness, because it has missed out on some deals, with intermediaries carefully watching the terms of their own cover. It’s in both parties’ interests to fix that situation, and that’s what we’re helping to achieve.

There is another interesting unifying factor in SMEs who turn to the peer-to-peer option. The very newest businesses are often turned away, or know that they will be rejected and so go elsewhere. The longest-established businesses have tried and tested funding arrangements and long-term relationships with conventional lenders. Our partners at Experian say it is businesses between five and fifteen years old who make up the bulk of P2P converts.

Experian’s Rolf Hickmann puts it like this; “The highest success rates are among medium-sized and fairly established firms with mature structures.” Or, in my own words, successful borrowers are young enough to be flexible and creative, but old enough to get through the door in the first place.

When I first read that 5-15 statistic I skipped part of the context and wondered what kind of parents are letting their children take out peer-to-peer loans – for pop music and magazines, probably – but it all made good sense on a second reading.

There is a perception that P2P lenders will go where more conventional lenders fear to tread. But this isn’t to say that companies like FundPopulus will welcome high-risk propositions with open arms just because no one else will. According to one peer-to-peer lender who has recently chosen to join us as a Patron, they rate their own risk appetite as being lower even than established high street names. I don’t think that is a case of “they would say that wouldn’t they” – rather, that lender is reacting genuinely to a misconception. Experian claims that 32 per cent of borrowers (using P2P platforms) are rated at below average risk, which is a greater proportion of low risk borrowers than the market as a whole.

What’s clear is that the niche in the market is wide open for the riskier end, and well sewn-up at the low-risk end. Any brand new funder is going to find market pressures pushing them towards offering rates that don’t quite match the risk profile, and it’s how they resist that pressure that will be source of some interest in the coming year. The Peer-to-Peer Finance Association (P2PFA) will imminently be reporting on its progress in the first quarter of this year, coming off the back of a strong Q4 in 2016.  It’s easier to post massive growth rates when you’re still a fledgling industry. If this is a race against other forms of lending, let’s not forget the P2PFA is coming from a long way back. And if it’s 5-15 year-old businesses that make up the single biggest slice of successful borrowers, there’s a sense that the youthful P2P industry “wouldn’t lend to itself”.

Nonetheless, the NACFB is proud to include nine lenders who follow the peer-to-peer model among our full panel of Patrons, because that’s what it must be; a full and representative panel.

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