Marketplace lending fills a market gap in Small Business finance

Marketplace lending fills a market gap in Small Business finance

Sunil Aranha, CEO ThinCats Australia – 24 April 2017

The fundamentals are clear. Small business in Australia needs finance to grow and capture market opportunities. Banks generally lend based on real estate security and small businesses run out of “real property” to offer as collateral security and can’t obtain growth finance when they need it most. There are over 2.1 million small businesses in Australia with a potential $10b per annum growth funding requirement, not being fulfilled by banks.

These are growing, bankable small companies that cannot afford and will not pay the exorbitant rates or comply with the onerous and in many instances opaque lending terms offered by many Alternative Finance short-term lenders. These “Alt Finance” lenders proliferate the market with “online” deals offering fast approval, small value loans, usually less than $50k. This is “emergency” funding and not growth finance which has been in existence since the merchants of Venice and has moved from the offline private finance world, to the online digital world over the last few years.

The driving factor behind the high interest rates of competitor “Alt finance” lenders is their high cost of capital combined with the fact that they are taking high risks, so must charge accordingly, to have sustainable businesses. The money they get to fund their loans usually comes from large financial institutions.

This is where Marketplace lending platforms come into play. The aim is to connect a community of investors (savers), usually Self-Managed Super Funds or High Net Worth investors who typically have a large amount of term deposits in banks earning extremely low rates of interest with small business borrowers who are willing and can afford to pay a higher return to these investors from a share of the profits they expect to generate by growing their revenues.

The unique aspect of marketplace lending is “fractionalisation” where many lenders participate in each loan and diversify their risk by lending small amounts to many borrowers. It presents a win-win for both groups and the sustainable “recycling” of money has a multiplier effect on economic growth, GDP and reward to society!

This new Marketplace is made possible because of access to information through advancements in technology which allows investors to directly participate in a market that has been a mainstay for bank profits over decades. Ethical marketplace lending platforms provide detailed and transparent borrower information, empowering and connecting investors (lenders) directly with worthy borrowers, via a secure online platform, with long-term growth finance periods of 2 to 5 years offered.

At ThinCats Australia, we practice these values. We are a tried and tested lending platform, with ThinCats UK our JV partner, a leader in UK marketplace lending who have over the last 7 years connected 5,885 lenders with 829 loans amounting to £230 million, an average loan size of £276k. This has generated a gross weighted average return of 11.19% p.a. to UK investors.

Here in Australia we are still young and while facing the challenge of introducing a brand new concept into this market, we have over the last two years connected around 100 High Net worth, wholesale investors (lenders) with over 45 loans to a diverse mix of borrowers, including solar energy suppliers, jet fuel wholesalers, super food manufacturers, medical, health and wellbeing service businesses and a large number of traditional wholesalers, importers and retailers.

Borrowers get to tell their story and wholesale investors make direct loans for 2 to 5 years. Investors earn the same rate of interest that borrowers pay, usually between 14% p.a. and 16% p.a. with monthly principal and interest payments – and ThinCats earn revenue by charging borrowers a fee for service.

All costs to borrowers and risks for investors are transparently stated and are aimed at empowering the community and facilitating a true SME lending marketplace.

With the continued support of new investors and small business borrowers ThinCats are fast filling this market gap and welcome new lenders and borrowers to engage with on our platform.

 

 

Why advisers should consider P2P

Why advisers should consider P2P

FT Adviser  21Apr 2017 – Kevin Caley is founder and chairman of ThinCats UK

The peer to peer industry has grown at a phenomenal rate in the last decade and many have embraced it as a welcome new channel for investors to earn healthy returns on their money.

But when it comes to recommending P2P to their clients, financial advisers still approach the sector with caution. Part of this is because it’s a new asset class seen by some as unproven. There is also the misconception that P2P is ill-prepared for an economic downturn or overly risky.

This year, most major platforms are likely to be granted FCA authorisation for their innovative finance Isa products, marking a watershed moment in terms of the sector’s growth.

With this in mind, it is clear advisers are starting to become open to the benefits P2P can offer their clients – set rates of interest, varied terms for lending, diverse portfolios of investment opportunities to spread risk, and the potential for better interest rates than with many other forms of investment.

One criticism levelled at peer to peer has been that it’s unproven and unregulated. Central to this is the concern that investments aren’t covered by the FSCS. P2P lenders make loans directly to each borrower rather than going via an intermediary, so FSCS cover isn’t relevant.

It’s worth remembering P2P loans perform differently from equities, offering fixed rates of interest, with returns not susceptible to market turbulence.

This doesn’t mean, however, that there’s no protection for investors, as each individual loan is direct and remains enforceable even if the platform fails. What’s more, P2PFA membership and FCA regulation also provide arrangements that manage an orderly run-down of loans in the unlikely event of platform failure.

With peer to peer still relatively young, some also question whether it would survive an economic downturn. But it should be noted that platforms are distinct from the performance of the loans that they offer.

They act like an agency, so even if one goes out of business, the loans remain in place. A financial crisis may also cause some borrowers to face difficulties repaying, so it’s the platform’s job to minimise the possibility of default and protect loans with security and reserve funds.

Peer to peer platforms tend to offer higher returns than other asset classes and will be viewed as more risky as a result. But it’s worth remembering P2P loans perform differently from equities, offering fixed rates of interest, with returns not susceptible to market turbulence.

Loans are based on a contract between the lender and borrower so they can deliver a predictable return. And while there is a low risk that loans may default, this is carefully protected against so as to be manageable within the advertised rates.

This year the peer to peer market is likely to be transformed by the arrival of the much-anticipated Innovative Finance Isa among the leading platforms. The IFISA market is yet to come into full effect, but when it does, the amount of P2P investors could potentially double.

While some have expressed concern about the ability of platforms to accommodate this influx, the UK’s strong regulatory framework has been working closely with the industry to ensure this transition will be smooth.

So for advisers and their clients, this tax year will present a great opportunity to earn sizeable tax-free returns, which beat rock-bottom cash Isa rates, and unlike stock and shares Isas, are protected from the rollercoaster ride the markets have become.

 

 

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