This has led to the growing anticipation of when and who will be the first P2P lender to collapse and what impact this will have on the industry?
With these reactions dampening the industry’s spirit and with Lendy going into administration, the Financial Conduct Authority (FCA)’s swift moves to protect investors and the bridging sector are welcome.
We have found that the term ‘P2P lender’ is overused and generalised, but the key thing to understand is that they all have different business models.
The lenders who are more likely to fail are those who rely on raising funds through their platforms for deals which have not completed yet and have not been fully underwritten.
This means it takes longer to complete deals, the investors are less informed when asked to commit and the whole team is always under pressure, which leads to mistakes.
When you are restricted on speed, you attract more complex deals that have potentially been around for a long period of time that other lenders have declined for various reasons.
On the other hand, lenders able to use their own funds to complete on transactions first can move quickly and secure quality deals that require a lender to work with speed.
These de-risked lenders approach their investment platform after they have completed the full underwriting process, legal due diligence, fraud checks, searches and all necessary valuations.
Right type of investors
In addition to when projects are placed on the investment platform, it’s also of great importance to look at the type of investors that are brought into the platform.
Those who are selective and only allow sophisticated investors will have a much higher chance of long-term success.
For many investors, the thought of earning 10 per cent from asset-backed lending is an attractive prospect.
To achieve this as a net return in a sector means that the type of deals that need to be invested in are on the higher end of the risk spectrum.
This may mean they have to consider deals at a higher loan-to-value, or which require construction work, have an unusual asset type, are in a less proven location or have inexperienced clients.
Know when to say no
Many P2P lenders have approached this in the right way, with a balance between offering high returns to their investors and sensible lending, through the right structure and careful recruitment.
This includes hiring business development managers with solid understanding of the market and a role within credit, and underwriters who understand the lender’s risk appetite clearly and, most importantly, know when to make the difficult decision not to proceed.
Offering excellent service, providing solid terms and showing consistent decision making will entice the market to send the lender suitable transactions that reflect its appetite and demand.
The bridging sector is clearly growing. The increased focus on regulation in the area proves that there is a bright future ahead and that bridging will continue to be an exciting area to operate in.
The new regulations from the FCA will provide more confidence in the market and encourage sensible lending without restricting creative ability to source funds and to allow lenders to flourish.