However cool a business concept may be, it bears the risk of failure or falling short of expectations due to lack of funding. Getting funds for establishing a startup is challenging if one resorts to conventional ways of fundraising instead of turning to alternative funding sources – alternative lending services, including the peer-2-peer scheme. P2P platforms have been around for years to enable businesses to lend from a variety of institutional investors – and even physical persons. A striking example of this is the Funding Circle (about 60 000 investors and over £2.1 billion of funds granted to businesses). Its core activity is loaning to small and medium-size businesses. Over the last two years, it has received one of the biggest sums as investments in a fintech company – $100m. Prosper, a platform opened in 2006, ranks second today in the USA, and has loaned over $8 billion for all the time.
By the way, the alternative funding market in Europe is not just a developed one, but it is often supported by the state in every way. The above-mentioned Funding Circle emerged in the right place and at the right time when Great Britain was witnessing business funding challenges. It fostered its development, and the result was the opening of a host of new job opportunities. Moreover, crowdlending currently is a major competitor for the conventional banking area. In the future, it will consolidate its position because, due to introducing new Basel lll requirements to banks, including a reduction of risk assets, the requirements to bank lenders will become ever more stringent. In contrast to this, alternative funding is moving consistently to utmost streamlining and acceleration of all processes – starting from reviewing an application and ending by scoring a borrower, looking for lenders and directly collecting and transferring funds. There is also no need to draw up business plans and report regularly. This offers more elbow room for a business – with an option of both erring and changing the strategy during operation.
Note that, regardless of the historically established huge concentration of capital in Great Britain, the alternative funding market is represented extensively in this country. Other countries are not lagging behind, but are even overtaking some market trailblazers. This is about the Chinese market, which currently is at the peak of development, and in particular, about the Lufax company that has outpaced many market giants in issue volumes. Alas, the continental European market is developing slow because of certain governance nuances. But this is no obstacle to emergence of services, which, in turn, help existing loan platforms by bringing them together with institutional investors. A fine example of this is Blackmoon Financial Group, a company with Russian roots. Recently, it has helped the international fintech holding ID Finance attract 10 million Euros from institutional investors. In spite of the nuances, opportunities of using alternative funding are available, offering hope of further market development.
For instance, in 2015, Austria adopted an act that governs and legalizes the operation of companies involved in non-banking lending. But at the same time, in the biggest fintech country in Eastern Europe – Russia – and in several EU countries, there is yet no such document. Accordingly, there are no prerequisites to expect such cozy, almost hothouse conditions for such companies with the appearance of such a document. Both a clear legal field and an infrastructure are needed, i.e., escrow accounts that ensure risk minimization and performance of obligations. At the same time, in contrast to many other countries, Germany has a credit rating of companies that protect the investor. The market leaders have long proved their reliability, though newcomers in this area will be facing challenges.
What kinds of non-banking business lending platforms exist?
Due to the emergence and advancement in Europe of consumer P2P platforms, allowing physical persons to lend to one another under the supervision of the platforms per se, a common delusion is that P2P is an exclusively consumer issue. According to data of KPMG studies, the last 3 years period demonstrated a 131% growth of the share of mutual business lending, with the share of peer-to-peer consumer lending having increased merely by 54%. And these are far from all models of alternative lending today. The most innovative products for business are acquiring the features of conventional consumer products such as credit cards. They allow business to use a certain limit at any time just as physical persons have been doing this for long.
When choosing an appropriate model of non-banking p2b\b2b lending, take into account both your needs and capacities, namely, answer the following questions: what do you want to get and what are you willing to give in turn.
Crowdfunding – investments for a remuneration from a company. Prosper, Property Partner, Finnish Invesdor are operating in this niche. Kickstarter, known to all, is also worth mentioning.
Crowdlending – this is mutual business lending assuming a return on investments (Funding Circle).
Crowdinvesting – an investor receives a share in a company with a view to growth of the value of one’s purchased share and, certainly, receiving dividends from company operations (Crowdcube, Seedmatch).
Refinancing receivables or online factoring. A loan is provided on collateral in the form of expected payments or accounts receivable.
Invoice discounting – this is in essence factoring, but with a somewhat other funding structure. Within its framework, funding is not split into deliveries but is paid in full on spot. In case of assignment of claims, the lender will bear the obligations of reimbursing the factor the funds underpaid by the borrower.
The key marker driver indisputably is crowdlending. It means business lending by physical persons, as a rule, within $50 000 to $500 000 for a term of several years. This is actually win-win model – and the borrower who has received money at lower interest in short time and with no fuss, and the investor with a return on investment many times more than in case of depositing funds with a bank.
How does it work
Everybody knows something how a bank operates as an intermediary between a borrower and lenders, and likewise understand that that it is the bank who gets the lion’s share of the commission. Let us remove the bank from this chain and we will get interest rates that are more beneficial for the borrower and yield a more substantial income for the lender. For the latter, incidentally, this is a great opportunity to boost one’s income by several times because the average annual deposit interest rate in Europe, according to the analytical data of the Raisin startup, is currently 0.3-1.2%, whereas сrowdlending platforms offer 3-7%. The risks, as compared with other non-bank products, are also minimized ultimately because the total loan amount is divided into shares from different lenders – you can invest both a big amount of $10 000 and a simple untied amount of $100, thus making this kind of investment most attractive today. The risks are also minimized by diversifying the lender’s portfolio.
The function of the P2P platform as an intermediary is somewhat different. It implies the bringing together of a borrower and lenders, a scoring check of the borrower, proving his reliability, and providing convenient payment methods or undertaking to collect overdue accounts – and all this at a small interest rate in contrast to a bank one.
The prime trend today is transition – though even a smooth one – of well-established companies to alternative funding. If earlier this was a gold mine primarily for startups and small companies looking to plug periodically a cash gap, today more hefty and well-established companies are considering the option of getting non-bank loans. This means that confidence in alternative platforms of business lending is growing.
Thus, KPMG data show that, even without account of Great Britain’s market as the most extensive one, the European alternative funding market has been growing steadily. By late 2015, it had reached the point of €1 trillion, with a 72% growth in 2015. This is only 19% of the market because the 81% share in Europe belongs to Great Britain. As a whole, by late 2014, Europe had as much as 510 platforms whose activities were closely linked to alternative funding. The volume of loans these platforms attracted had reached €4.2 billion in 2015.
The major vector of development of the European market can easily be called market segmentation because the main goal presently is to retain returns and lower risks without losing the convenience of such platforms. Market segmentation makes this possible if a clear formula is followed: rather than placing emphasis on platform universality, and so forth, focus on the region and its public, and their needs. Thus, the German company BillFront is now operating as an online factoring platform exclusively for media companies, and it is performing very well in its niche. The Austrian platform Finnest, for example, has established criteria for borrowing companies: an age of no less than 10 years and an annual turnover exceeding €10m. There are companies who target startups and seed projects. They are counting on that the default level, against a background of established companies, will be moderate. Interestingly, borrowing companies sometimes not only merely attract an investor, but also turn him into their customer by paying for investments with vouchers, premised on a certain growth rate, to buy one’s products or services.
Regardless of that the P2P lending industry is still evolving, no limits of growth are yet evident. This is because there exist both very developed and stable models like crowdlending, which present strong competition to banks, and innovation products that are attempting today to occupy their niches in the industry. Alternative funding has trodden a long path from something new and unconventional to a huge financial machine. It is scaring companies accustomed to conventional lending by its simplicity. And in spite of the meaningful results and the growth level achieved, it is just starting to gain momentum.
By Boris Batine, co-founder and CEO at ID Finance