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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency

‘Caveat Emptor’ Is peer to peer lending too risky for peers?

peer to peer lending house of cardsPeer to peer lending (P2P) enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman.
As such, the lack of trust in middlemen has seen the emergence of peer to peer lending platforms as an attractive proposition for retail investors in a climate of low interest rates because they can offer better rates thanks to the lower overheads associated with online businesses. The lower overheads are also related to not having to pay a middleman!
The platforms are generally a website or app that facilitates this alternate method of financing, where the first emerged in 2005 and was brought under FCA (Financial Conduct Authority) regulation in 2014.
However, the FCA has been criticised as being too “light touch” in its oversight following the collapse in May this year of UK property finance peer to peer firm Lendy with £160m in outstanding loans of which it has been calculated more than £90m are in default.
According to CityAM, Lendy was placed on a FCA watchlist last year amid concerns about its inability to meet the standards required of regulated firms. Its subsequent failure is believed likely to result in retail investors losing £millions.
The demise of Lendy came a year after the peer to peer platform Collateral UK went into administration, reportedly, according to the website crowd funder insider, after it was discovered that it had wrongly believed it was authorized and regulated by the FCA under interim permission.
FCA chief Andrew Bailey has been reported as saying that the decision to authorise Lendy had been taken to reduce consumer harm, as refusing authorisation may have risked greater damage.
However, Adam Bunch of the Lendy Action Group, which claims to represent about 900 investors, said: “FCA authorisation was seen by investors as a stamp of credibility. Only now, after the platform has failed, do we learn that the regulator in fact saw authorisation as a way to contain a badly run business”.
I would add that the reference to ‘investors’ worries me since there seems to be no distinction between shareholders, secured lenders and unsecured lenders nor any understanding of ‘caveat emptor’.
Indeed, Lendy was a lending platform and there is no mention of the peers as retail lenders who have a prior ranking claim over investors (shareholders) but I am sure it highlights the ignorance among retail investors and lenders who might be better off seeking advice from professionally qualified middlemen.
Not surprisingly, there have been growing calls for tighter FCA regulation of peer to peer lenders and in June, following consultations, the FCA launched new, tighter regulations, most of which will come into effect in December this year.
They include introducing more explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise and a requirement that an appropriateness assessment (to assess an investor’s knowledge and experience of P2P investments) be undertaken, where no advice has been given to the investors and lenders.
In September the FCA also warned peer to peer lenders to clean up poor practices or face a “strong and rapid” crackdown.
Whether this will be enough to stem the reported exodus of investors’ money from peer to peer lending and to better protect them remains to be seen.
However, the warning to potential investors remains as it has always been to not invest any money you can’t afford to lose.

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Banks, Lenders & Investors Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

How can smaller businesses fund growth in the economic upturn?

 

A new report by the Credit Management Research Centre and Taulia has revealed that UK companies have been relying heavily on trade credit.

It is also well known that traditional bank lending to SMEs declined by 20% in the last 12 months.

This is despite bank claims that they have plenty of cash to lend and a perception that they are declining loan applications. More realistically the decline in bank lending is down to loan criteria being tightened and the fact that credit worthy companies have been paying down loans instead of funding growth.

So how are small businesses going to fund the expected increase in business and orders that come with economic recovery from recession?

If a company accepts orders without being able to finance them it runs the risk of insolvency through overtrading, which is why so many commentators point out that most insolvencies occur during the upturn after a recession.

Given that many good businesses have used the recession to pay down debt, it can be assumed that their balance sheets have improved and therefore they will be easily able to raise finance for growth from the banks.

However there are a lot of SMEs that do not have a strong enough balance sheet to justify traditional funding. Where these sources are not available they are looking to fund growth using alternative sources of finance.

In the past such sources were myriad, such as from friends and family, negotiating deals with well funded suppliers, early payment terms from customers and even credit cards, but the banks remained dominant. Over the past 20 years asset based lending has grown since it can advance more funds than the banks due to the specific pledge nature of its security. More recently we are seeing a new route to finance from peer-to-peer and crowd funding websites.

The website based sources appear attractive and are often easier for obtaining funding but they can incorporate obligations such as a personal guarantee for the loan from the directors.

In April 2014 the FCA (Financial Conduct Authority) introduced new rules on loan-based (money loaned) and investment-based (share subscription) crowd funding that require the lenders to carry a certain amount of capital, to be open about defining the risks and to have resolution procedures in place in case of the lending platform failing.

It is likely that the online funding platforms will become stricter and require more information from borrowers before making a decision, but if used wisely they offer a great source of funding to growing SMEs.