Traditional Funding is Broken. So what’s the solution?

02/07/2019

The conventional route to lending is drying up. Traditionally, if you wanted to take out a loan, you’d go to the bank. But we now live in uncertain times – and uncertainty breeds caution, particularly in finance. All evidence suggests that banks are increasingly reluctant to lend. Last summer, UK consumer loans fell to their slowest growth since 2015. For higher risk investments, such as development debt, this is especially true, with lending to property developers dropping by £1.2 billion over 2016. While it is right to protect the masses by de-risking lending by banks to ensure stability and capital adequacy, low interest rates and risk appetite don’t represent a good environment to borrow.

What are the alternatives?

Alternative funding has been on the rise for more than a decade and is a market now worth almost £9 billion in the UK. The origins of these alternatives, including crowdfunding and peer-to-peer lending, were admittedly rocky at first.

Crowdfunding

Though crowdfunding still struggles at times to shake off its adolescent image, this market has now matured significantly in just a few years, in part due to changes in how it is regulated. Loan-based and investment-based crowdfunding now require FCA authorisation: this regulatory backing provides security and has made crowdfunding a very viable and attractive option for scale-ups and high-earning investors. Crowdcube has previously reported that their average investor is in their thirties or forties and has some existing knowledge of the finance sector. This financially savvy generation of responsible investors is a far cry from crowdfunding’s origins of early-stage start-ups receiving donations via Kickstarter.

Peer-to-peer Lending

The peer-to-peer lending market originally made some poor decisions, as is typical with any emerging market, participating in a few ill-judged lends. When regulators stepped in, culminating in Wonga’s collapse, this forced the market to mature fast. Now peer-to-peer lending has become a viable alternative to banks. Thanks in particular to a new package of measures from the Financial Conduct Authority in July last year, peer-to-peer lenders must now ensure they provide strong backstop protections for their investors, such as contingency or provision funds.

Peer-to-peer Lending for the Sophisticated Investor

Peer-to-peer lending is brilliant as an investment alternative, but the key challenge the industry struggles with is deal flow and visibility on ready-made deals. Coming from an outside perspective, it is tough for peer-to-peer lenders to understand the asset classes involved or the assets behind the security in question. They do not have enough visibility to know if the investment will fold and they risk an investor losing their money who cannot afford to do so.
That is why the most sustainable alternative funding route has to be peer-to-peer lending for sophisticated investors with high net worth. This type of investor is the only type who can truly afford to invest in risk capital. If, for example, you earn over £100k per year, you have gross assets of over £250k or you run a business, you have enough financial awareness and security to be able to make your own decision on serviceability.
But where the real value comes in is with lending visibility. We employ financial, legal and wealth management specialists in house, which gives us a high level of understanding of our clients’ financial and legal situation. Because we personally know both the borrower and the lender within our client base, we have much stronger deal flow than the typical peer-to-peer lender and we can make more informed decisions on whether to approve deals – which means we can say yes more often. We can also mitigate tax more effectively than VCs, banks or peer-to-peer lenders thanks to our decades’ worth of internal tax planning expertise (for example, through the use of pension scheme lending) and our understanding of what our clients want to achieve with their money. It’s a fairer system all round.

The Future of Funding

While banks offer a great service from a retail perspective, they can’t afford to play with risk capital on the wealth management side, leaving customers looking for alternatives.

Though peer-to-peer lending and crowdfunding represent a great opportunity, these markets are still maturing and require more regulation. We have to be realistic. The best option for high net worth investors today is a peer-to-peer sophisticated investor lending system that is based on transparency and fairness – and ultimately a system that helps them reach their financial goals. 

Speak to one of our advisers today to discuss your own tailored wealth performance management programme.

Joe Priday

This article was written by Joe Priday

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