Beyond P2P – The next wave of innovation in business finance
The reluctance of banks to lend to businesses has kick-started massive innovation in business finance. This week peer-to-peer (P2P) lender Zopa passed the £1bn lending mark and is expecting to do the next billion by the end of 2016. Peer-to-peer lenders have captured the public imagination by offering an alternative to banks.
Yet, focusing on P2P misses a huge part of the story of how funding in Britain is changing. P2P lenders innovated on the funding side by sourcing liquidity from individuals rather than institutions. That was helpful during the banking crisis when funding was scarce. Today we are facing fundamentally different challenges. There is plenty of funding available but businesses are still finding it very difficult to access credit.
This is because P2P lenders have often failed to innovate in terms of their assessment of creditworthiness, instead replicating underwriting models of the past. They have tended to build up large underwriting departments and look for the same type of risk profile as banks. That does not unlock credit.
Peer-to-peer has distracted from a potentially much more powerful source of innovation on the lending side. Funders have been finding new ways to assess business risk. They have also found ways to reduce the operational cost of underwriting and to insure risk. These innovations have made it possible for a much broader range of businesses to be funded on terms that are attractive.
There are currently many of these innovative finance providers – innovating in underwriting and technology. For example, URICA harnesses the Euler-Hermes database to understand the credit risk of 40 million companies anywhere in the world. This means URICA are able to make near instant decisions on whether to provide SME invoice finance on individual or multiple invoices, opening up a completely new way of underwriting trade.
Some P2P lenders have also led innovation in developing new products. For example, Market Invoice has brought single invoice finance to small companies unlocking short term working capital to small companies that trade with large corporates that often have payment terms of up to 100 days. The success in product innovation has driven Market Invoice’s impressive growth – providing £1m in funding every single day in July.
However, widespread innovation in underwriting models is baffling borrowers. New models are specialised and it is therefore hard for any one business to find the right funder and the best terms for their specific situation. Businesses are not yet aware of all the new funding options available to them.
The next wave of innovation in business finance has to connect those who are looking for funding with those who are offering funding – matching the right borrower with the right funder while also building ‘trust’ between both parties. This is the way to get credit flowing to businesses again.
Finance platforms will fill this gap by mediating between businesses and finance providers. The winning platforms will simplify business finance and deliver best available quotes from the whole of the lending market in a transparent and unbiased way.