In this head-to-head column we put Nick Moules, communications manager at rebuildingsociety and social lending fan, up against sceptic Henry Ejdelbaum, managing director of ASC Finance for Business.
Nick Moules, communications manager at rebuildingsociety
I’m often asked “so what’s the true potential of peer-to-peer?” such is the impact of the market on commercial loans, personal loans and equity funding for new businesses. If there is a demand for funding and people willing to lend for rates that meet their risk appetite, then peer-to-peer can exist almost anywhere.
Mortgages is a market that has the potential to be funded by peer-to-peer.
Taking property as security in loans will certainly appeal to more risk-averse individual lenders, but returns will be lower than those who already lend to businesses in the peer-to-peer market.
For peer-to-peer to fund mortgages on a grand scale, you have to ask whether both sides of the arrangement will be happy. The reason behind peer-to-peer’s success to date has been its ability to offer better deals for both sides (lenders and borrowers) by operating on small margins in markets where traditional operators took higher margins on tighter lending criteria.
If a business wants to grow, but is only offered high interest products like an overdraft or credit card by its bank, but it can get a loan at 12% through peer-to-peer it will be delighted. Similarly, someone lending could lend at 10% on the same deal, comfortably outstripping any ISA rates, but without the safety net.
A lot of mortgages are going cheaper than 5.5% at the moment, even at high LTVs, because of the Funding for Lending scheme and record low base rate. So would anyone with a good credit rating and sub-3% deal want a 5%-plus mortgage through peer-to-peer at the moment? Probably not. Anyone funding those deals would only expect to get 2% returns with no FSCS protection, so it doesn’t make sense for the lender when you factor in inflation.
But as with any market, there will be demand somewhere. Sub-prime borrowers on higher rates with little equity could look to re-mortgage through it, and as peer-to-peer looks for a hold in the market it could provide new impetus in areas where other players have pulled out, like buy to let, interest-only or Northern Ireland. If enough lenders can spread their risk and are comfortable with the pitfalls of lending in these markets then you have a deal.
It will start small, but should conditions change where it becomes harder for regular borrowers to get a mortgage, or rates go up, the relevance of peer-to-peer will only rise.
Henry Ejdelbaum, managing director of ASC Finance for Business
A lot is being talked about the benefits of social lending for businesses. There are a number of companies which are quite active in this field. I have no doubt that they are all reputable organisations with good intentions.
But I’m not completely convinced of its potential. There are aspects of social lending which have gone unnoticed; For example, just look at the volume of business loans which have been undertaken by social lenders, the numbers are a drop in the ocean.
Whereas all the major clearing banks lend billions, I think the top of the three social lenders (Funding Circle) has just reached their target of £100 million three years after opening for business (to put this in context we arranged £64 million of finance for small businesses in the past twelve months).
The other question is to do with the administration and system requirements which for these businesses are immense. The companies have to deal with a multitude of small lenders and a multitude of borrowers.
That means they need a slick and efficient capacity which also means they have to employ numerous people coupled with advanced computer systems. All of this costs money and whatever little I know about the commercial finance market, the fees charged by the social lender are in my opinion insufficient to offer a proper reward.
All of these factors are big issues even before we talk about the credit assessment which is clearly different. I’m not saying that the credit assessment part by most banks is sensible – on the contrary! But clearly the volume of business undertaken by the social lenders is insufficient to offer a risk assessment which would protect the investors.
Finally, let’s not forget that many social lending investors are drawn to this type of investment because interest rates for savings offered by banks are low. This may change as the economy changes. Once there are better alternatives, the attraction of social lenders for savers may disappear and that will cause a drain on the supply of money.
Let me repeat again.
I’m really not against the concept of social lenders. I like any new business idea and I like entrepreneurs who push the boundaries of traditional businesses. I would love to see social lenders be more successful but for the reasons explained above I’m just a little bit more conservative in my assessment.
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