At the end of last year, the Financial Conduct Authority published its consultation document for the regulation of peer-to-peer lending.
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At the end of last year, the Financial Conduct Authority published its consultation document for the regulation of peer-to-peer lending.
Laura McMullen, Business Development Director at Funding Circle, explains how regulation will fuel non-bank finance in 2014.
Perhaps unusually for the financial services industry, it was met with great enthusiasm by CEOs of the peer to peer lending platforms that will be affected. That’s because when the FCA announced they were planning to regulate the industry at the end of 2012, it truly was a watershed moment in the world of finance. There is no doubt that it will help to boost awareness and credibility of a sector which is already trebling every year.
Non-bank finance has exploded in the last three years.
Since launching in 2010, Funding Circle has allowed individuals and organisations to bypass the banks and lend directly to small businesses up and down the country, through our online marketplace. By cutting out the red tape and bureaucracy associated with traditional bank loans, businesses are able to access finance more quickly and at times to suit them. Over £200 million has been lent through us in the last three years; £130 million in 2013 alone, helping to create an estimated 6,000 jobs across the UK.
Intermediaries continue to be instrumental in the industry’s growth. We have seen a threefold increase in the number of brokers we have relationships with in the last year and we expect this to grow further with formal regulation of the sector. Where brokers may have sometimes been cautious of this new model for business lending, we think that regulation will allow them to sell peer-to-peer lending to their clients more confidently.
No longer do businesses just need to think about the ‘big four’ when looking for a loan to expand and grow. With many non-bank finance options on offer, there is a plethora of choice. Businesses, whether they be start-up or more established, can ensure that whatever finance option they choose, it is completely tailored to them.
One of the advantages is that a number of people come together to lend to a business, rather than just one individual. For example at Funding Circle, British people and organisations such as the Government, councils and universities, all club together to fund a loan on the platform. Once a loan is posted on the marketplace, an auction takes place where each investor bids the amount of money they wish to lend and the interest rate they want to earn. This ensures a competitive rate for the business taking a loan. We are finding that business owners often see this investment by a ‘crowd’ of people as validation for their business plan.
Many busy business owners don’t have time to go to endless face-to-face meetings during working hours. Alternative finance providers are more able and willing to accommodate this preoccupation than traditional banks and this is a major factor in our increasing popularity – currently 50 per cent of all of our initial loan applications are completed outside of bank working hours. Speed is also of the essence. Our credit assessment team will deliver a decision to applicants within 48 hours, and the funds typically reach the business within two weeks of the initial application. Our complete process is done online and is built around being quick and simple. We don't require introducers to visit clients or to submit business plans.
As the industry has grown, so have the number of potential options out there. It might be difficult for businesses and intermediaries to know which platform is the best for them. My advice to them would be to research which platforms support the various different stages of business growth, as well as think about the type of finance needed and the security available. As the UK’s leading peer-to-peer lending marketplace exclusively for business borrowers who have been established for two years or more, we have helped over 3,000 businesses access the finance they need to grow and expand.
A recent report by Government think tank, Nesta, predicted that the peer-to-peer lending industry could be worth over £12 billion per year. The introduction of regulation is the first step to ensuring this is achieved. There are thousands of businesses across the country who deserve access to finance and I believe regulation will cement the place of non-bank finance in the wider financial services ecosystem.
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