What is theBankDoctor.org and what is your interest in the SME marketplace lending sector?
theBankDoctor is an independent Not for Profit website that helps small business owners deal with the challenges of funding their business.
We believe marketplace lenders can be a genuine option for small business owners who need debt to sustain and grow their businesses. But borrowing from a marketplace lender is a very different proposition to traditional bank finance. Marketplace lenders are largely unregulated, they do not have the financial substance or track record of the banks, they have not gone through any periods of economic downturn or disruption and they are nearly all small private companies yet to turn a profit.
theBankDoctor exists to protect and enhance the interests of small business owners and so we see a need for small business owners to better understand the risks and benefits of borrowing from a marketplace lender.
As well as improving the financial literacy of SMEs we are also active in encouraging marketplace lenders to be transparent when it comes to fees, charges, and commissions and to proactively self-regulate in order to minimize the prospects of one or more less scrupulous operators harming borrowers and the sector more generally.
Q Why would a SME borrow from a marketplace lender rather than a bank?
Note, when compared to an unsecured facility from a traditional bank (e.g. overdraft, invoice financing), an amortising loan from Moula could amount to less with less administrative burden.
So when does it make sense to look outside of a bank? Marketplace lenders do have an important role to play in situations where:
- You need the money in a very short period of time, with minimum hassle
- The bank has said “no” (as is the case with 66% of small business loan applications)
- You don’t have or are not willing or able to offer property as security
- For some other reason, you just don’t like banks and are be prepared to pay a premium not to have to deal with a bank.
What advice would you give a small business owner looking to borrow from a marketplace lender?
You need to understand exactly what fees and charges you will be up for. You should also be clear about what the lender makes out of the transaction as well as any introducer who might be involved. This does not have a direct bearing on how much it’s going to cost you but it will help your form a view about the lender’s priorities.
Look for a lender that has a transparent and simple fee structure. Make sure the product you buy suits your funding needs. For example, a principal and interest loan is better when you are buying a fixed asset like a new piece of equipment whereas a flexible line of credit/overdraft or invoice finance is better if you need working capital pending payment of a large invoice.
Build a relationship with the people. Just because it’s an online lending entity, it doesn’t mean that there aren’t people there who can help you with queries or issues. Look for a lender who is willing and able to help solve or work through any issues you might have.
What do you see as the major challenges facing marketplace lenders?
At the industry level, awareness remains a challenge and this extends beyond the small business owners to their trusted advisors such as accountants. At the individual firm level, the biggest challenge is how to differentiate and communicate their offering. The market is already quite crowded with more than 25 lenders actively looking for business.
Meanwhile, marketplace lenders have an onerous task in keeping their backers on-side. Having patient and supportive shareholders is essential as it will still be some time before they will get a return on their investment. This means the lenders will need to find and maintain a balance between growing the book whilst maintaining underwriting standards. A “get big quick” strategy carries a high level of risk for any lending operation.
Marketplace lenders have a responsibility to ensure their own as well as industry standards of transparency and disclosure help build trust and confidence in the sector.
Where do you see SME marketplace lending in 5 years?
The marketplace lending sector will be vastly different by 2021.
It will be many times bigger. In 2015 marketplace lending to the small business sector totaled around $250m. Within five years it could easily be $2.5b which still represents a very small percentage of the total business lending market.
Some of the existing players will go out of business because they have not been able to generate returns to justify continued support of their backers. On the other hand, the better operators will achieve the critical mass necessary to produce the kind of returns that encouraged investors to back them in the first place. They will become more price competitive relative to banks as both borrowers and lenders gain confidence in their results.
Marketplace lenders will offer a broader range of products and terms and they will get better at pricing for risk. They will uncover new ways of adding value leveraging transactional data.
There will be much tighter regulation to protect to borrowers. This will come from legislation, as well as industry-led self-regulation.
One way or another, the big banks will have resolved how to deal with the inroads into the SME market made by marketplace lenders.