Funding Circle’s disappointing debut doesn’t mean all alternative lending platforms are overhyped. The following examples highlight the sector’s wide range of operators.
The market has been abuzz with talk about alternative finance lending platforms recently owing to Funding Circle’s (FC) initial public offering (IPO) in September. The flotation hardly lived up to the hype, but if the lender to small and medium-sized businesses (SMEs) can really go global as promised, I suspect we’ll see tech investors flock back into the stock. Most of the big tech firms that have come to market in the past few years have bounced back from post-flotation blues. It all boils down to whether you view FC as a pure financial or a hybrid tech company with global ambitions.
The debates surrounding FC have also prompted the long line of fintech cynics to surmise that every other fintech IPO will end similarly. I’m not so sure. If, say, LendInvest or Revolut – two widely different businesses rumoured to be interested in an IPO at some stage – did decide to go for it, I think the very big differences in their business models would shine through. The world of alternative finance is broad and very diverse. Consider the following three very different platforms.
A platform for gold bugs
Perhaps the most exotic is an outfit called Lend & Borrow Trust. It offers peer-to-peer loans – you lend money, someone else borrows money. But the big difference here is that the online platform focuses on gold and other precious metals. Let’s say you are an uber-bear who has stashed a large amount of their investments in the shiny stuff. How do you borrow against this very real asset? Most conventional lenders won’t have a box on their credit analysis system marked physical gold.
Enter Lend & Borrow, which will usually lend up to 75% of the physical gold value with interest rates that vary between 3.5% and 6.5% depending on the currency – Canadian dollars seem to be popular. In normal markets investors get a 3%-6% yield for lending to strapped gold bugs. If we all go to hell in a handcart, the gold investors are lending against should become more valuable. The obvious risk is that gold prices collapse and that physical gold plummets in value, but presumably you’ll also see margin calls triggered and the gold sold. The platform seems to be fairly small, but it’s a welcome innovation in the gold fintech arena – rather like Glint Pay, a gold-backed payment-card system.
SMEs get an overdraft facility
Returning to the mainstream world of business funding, I think Growth Street looks interesting. I was first drawn to this lending platform because of its link to my favourite digital bank, Starling. Growth Street will be providing Starling’s small-but-growing army of business clients with a working capital revolving credit facility – an overdraft. Growth Street offers SMEs rolling 30-day loans with interest rates starting at around 0.6% per month. This is a fast-growing platform that offers outside investors an effective rate of around 5.2% per year – there are currently 1,923 investors with an average outstanding investment of £16,000; the mean initial investment is £2,500. There are £18m of loans outstanding on the platform, while a £1.1m fund provides insurance against expected default rates of between 2.5% and 4%.
Lending against assets
Ablrate is another specialist in the business lending market. The “abl” refers to asset-backed lending. Asset-backed lending funds invest in everything from shipping and aircraft loans to factory fittings and machinery. If you want to borrow £100m or more for equipment, there’s usually a willing big bank more than happy to take an asset as security. If it’s a photocopier or car there are plenty of equipment-leasing specialists ready to help. But if you’re looking for a loan of between £0.5m and £50m, it’s much harder to get one. This is where I presume Ablrate is looking to build a market position.
It has lent out £42.8m so far, with returns in the 8% to 13% range. Crucially, it has a vibrant secondary market: you can sell your loan or part of a loan to another investor. You can also invest in Ablrate through an Innovative Finance ISA (IFISA), which means you can harvest the income free of tax.
The asset-backed lending sector offers security, usually against a real piece of equipment or property that can be resold if everything goes pear-shaped. That’s an advance on the personal guarantees and debentures frequently on offer in mainstream business lending. Nonetheless, bear in mind that the real skill in asset-backed lending is not giving the money out, but getting it back if the business doesn’t succeed. That may require real hands-on experience in managing default situations.