P2P sector poised to fill SME funding gap as recession looms
The industry benefitted from the so-called credit crunch at the time of the 2008 financial crisis, lending money to businesses when the banks withdrew. This spearheaded a period of substantial growth for the P2P sector.
With mounting concerns of an imminent recession due to Brexit uncertainty and global trade wars, P2P platforms say they are well positioned to step in again this time around.
“A recession is coming, it is just a question of when,” said John Mould, chief executive of P2P business lender ThinCats.
“In a recession, many lenders stop lending or pull back on lending. However, there are many great companies that will still need funding! The country needs good companies to be funded to help drive the economy out of recession.
“So for those lenders that can keep their heads there is great opportunity to lend well through a recession whilst others have stopped. This means that the platforms have to have good relationships with their funders to allow them to keep going and take advantage of this opportunity.
“A slowdown will challenge all lenders but is a great opportunity for the brave and well-run lenders.”
Graham Toy, chief executive of the National Association of Commercial Finance Brokers, noted that credit conditions were starting to get a little tighter and said the trade body’s broker members “are having to work harder” to place business as a result.
“I think that the more lenders we’ve got in the alternative and challenger space, the better for smaller firms,” he added.
“That can only help in a recession.”
A historic reluctance of banks to lend to smaller businesses in a downturn had created liquidity challenges for many smaller firms, particularly those operating in tight-margin sectors such as retail, according to Mike Cherry, national chairman of trade body the Federation of Small Businesses.
He said only one in seven small businesses are applying for external finance, mostly from banks, while just six per cent approached a P2P lender last quarter.
“It’s key that – recession or not – small firms are aware of all external finance options and their different benefits,” he added.
“Underuse of external finance translates into unrealised potential, weak growth and stagnant productivity levels.”
A recession could bring opportunities for P2P investors as well as borrowers, according to Assetz Capital founder Stuart Law.
“The next cycle will bring a new opportunity for investors to really understand what this sector can bring,” he said.
“In any kind of recession we will see Bank of England interest rates collapse and investors will pour into the sector like they did previously.
“Investors will be attracted by the P2P lending interest rates and borrowers will be let down by the banks again.”
While a recession could pose opportunities for the best and brightest P2P platforms, weaker companies could struggle, industry stakeholders warned.
Sophie Pearce, managing director of MoneyThing, said that alternative lenders are “generally well placed to capitalise on the opportunities that there are during adverse conditions” but noted that this would be the first time that most of them would experience a downturn.
“Generally in a recession late payments and default rates increase and we have not yet seen how the alternative lending market will cope under these conditions,” she added.
“There is always a dead period in a downturn as nobody wants to catch a falling knife,” said Assetz Capital’s Law.
“It could wipe out platforms if their volumes drop substantially. Some platforms may struggle to raise equity, we have already seen evidence of that.
“The time to have built your P2P business to a sustainable scale has been and gone. Now isn’t the time to be short on capital.”
This article featured in the September issue of Peer2Peer Finance News.
- September 2, 2019