Research carried out by my company, rebuildingsociety.com, suggests that 26% of people in the UK (or up to 12m) would consider loaning money to UK SMEs by joining a peer-to-peer lending scheme (“P2P”) in 2014, when the sector will be fully regulated by the Financial Conduct Authority (“FCA”).
Our research also suggests that 17% (eight million people) would consider P2P lending over the next 12 months, without additional regulatory protection. However, the added security should reinforce the sector, given that money lent through P2P is currently not covered by the Financial Services Compensation Scheme and lenders could lose cash if borrowers default.
Peer-to-peer lending – also known as person-to-person lending, peer-to-peer investing and social lending - is lending money to businesses or individuals online. The sector is set to boom, with as much as £12bn to be lent through SME P2P schemes each year, which roughly equates to one-tenth of total mainstream SME bank lending in 2012.
Our study underlines the attraction of P2P schemes to small firms, with about 24% (or 1.2m) believing they will struggle to access finance in the next 12 months. Given this, 16% of small firms would consider applying for a P2P loan over the next year.
The biggest obstacle to the growth of P2P lending is lack of awareness, with 59% of consumers not knowing what the term meant, while 54% saying that this is the principal reason why they wouldn’t invest in a P2P scheme, with 46% fearing borrowers not repaying the loan.
Typically, individual lenders can earn between 8% and 15% interest through P2P platforms, which is significantly higher than the sub-inflation returns offered by many bank and building society accounts. Basic rate taxpayers currently need to earn 3% on savings and higher rate taxpayers 3.99% just to keep track with inflation.
I believe that P2P lending is well on its way to entering the financial mainstream, thanks to strong levels of interest from consumers and SMEs. The FCA’s regulatory oversight from next year will provide consumers with an additional layer of protection and our study shows this is very likely to boost take-up.
The evolution of this market will continue to generate value for borrowers and lenders beyond the financial transaction. It can be viewed as a marketing activity and businesses that borrow through P2P lending have effectively won a crowd of stakeholders with an interest in the success of those businesses. This is more powerful than institutional finance and both parties are slowly adjusting to this mindset.
Clearly not all individuals and small businesses that are considering using a P2P lender will end up doing so but as long as borrowing and saving conditions remain depressed, demand will rise.
Blog supplied by Daniel Rajkumar, managing director of peer-to-business lending platform rebuildingsociety.com
Since the credit crunch first began to bite, some UK businesses have had to extend their agreed payment dates and terms, which means that some firms now face waiting as long as five months for payment. The average time it takes for businesses to settle their bills after agreed terms has also extended. Consequently, businesses must ensure their billing process is effective when it comes to overdue payments.
By addressing issues such as cashflow or order book problems early enough, businesses can stop them from escalating. But what action should you take and when do you need to start? Many businesses are too wary of being over-zealous when chasing payment so as not to upset a customer, but avoiding the issue could have a catastrophic effect. Here are ten tips for what to look out for and what steps to take:
1 Know your customer
Whether the customer relationship is new or long-standing, regular credit reports are essential. They are quick and cheap and enable you to be fully informed of any changes with the business. Perhaps you could use a particularly large order as a trigger to run a check or simply implement one every quarter or six months. As well as granting peace of mind it limits your exposure. The next stage is to identify and weed out any high-risk business prospects.
2 Assess payment behaviour
Keep an eye on changes in payment patterns, times and delays, as well as a move from BACS to cheques. These small factors can indicate something is happening behind the scenes. It doesn’t hurt to call the customer and have an informal chat, just to make them aware of your interest. These checks can also indicate how long you will be waiting for payment. Also be aware that bills being settled later and later each month is a key indicator of a business’s deteriorating cashflow.
3 Introduce changes
Your customers may just have a culture of late payment but to combat this, steps should be taken to encourage faster payment, such as direct payment methods or more creative collection strategies. Also monitor CCJs, because these can be a trigger to exercise some caution and review the relationship before extending credit.
4 Carry out checks
Regular company credit checks will also highlight small but possibly significant changes, such as who is on the board and any alteration in the addresses of those members. Also for smaller and newly formed companies, cross reference consumer and business information to build a picture of the personal and wider business interests and the track record of those running the business. Knowing what happened in the past creates confidence in future co-operation. When financial details are limited this can be the best indicator of a business’s commercial integrity.
5 Revise regularly
The validity and worth of credit reports lies in their frequency, which could be related to the value of business done, the importance of the account or the volatility of the market they are in. There is no point running one at the start of a working relationship and believing that will ensure there is no risk.
6 Be aware
Be mindful of external economic pressures because if you are feeling them you can be sure your customers are, too. The warning signs these present can be more effective than any internal procedures and controls. There is help - use the credit community, it's what it's there for; share information about your debtors and listen to what other industry people have to say.
7 Be accountable
Often businesses with poor trading results tend to delay submitting their accounts as long as possible. Experian research has shown the late filing of annual returns, which is a statutorily required list of directors and shareholders, is a characteristic of failing companies and at the very least can indicate a level of management inefficiency within the business.
8 Keep talking
Keeping communication lines open is key. As long as businesses are talking to their customers, resolutions can be swiftly and easily achieved without the need for legal action that can prove costly.
9 Take action
Don't delay. It’s tempting to wait and hope the payment will be made, but if the process is not started immediately, resolutions will take longer, putting cashflow under greater pressure and leaving you more vulnerable.
10 Call for help
While a business that can demonstrate a clear action plan is in place and was adhered to will more likely achieve a successful outcome, don’t be afraid to ask for help and advice. A quick chat with an adviser could help you identify the next most appropriate step. For example, a legal letter might be enough to bring the matter to an end.
Christopher Moore is the Marketing Manager at ICSM Credit
It's not easy raising finance for any business right now, least of all a start up. Which is why it's worth taking a few moments to find out how Simon Woodroffe managed to finance Yo Sushi, when the banks were turning him down.
Has anyone else out there been creative with early stage funding for their business? Please share your story.
I once interviewed a highly successful and experienced business owner from Northern Ireland. He was a lovely, intelligent man, senior in years, who swore by his “Five Per Cent Plan” – something he said could make a tremendous difference to the profitability of any business. It goes something like this…
Look closely at all of your business expenses and try hard to reduce each one by just five per cent – a reasonably small and achievable figure. That might involve cutting out more waste, using less or driving a harder bargain with your suppliers (many will gladly say yes, if it means hanging on to your custom).
A five per cent saving can be achieved in many areas quite easily, he reckoned, especially when you’ve been in business for a number of years, by which time many inefficiencies can build up. You never know, you might even be able to make greater savings. If a cost makes no tangible contribution to your business, you should eliminate it altogether, of course.
If a five per cent saving isn’t possible, you should aim for four, he advised. If not four, then aim for three. If not three, aim for two. If not two, then just one, but never settle for no saving unless there genuinely is no alternative.
Our friend from Northern Ireland was a plain speaker and a realist. He smiled and conceded that reducing costs, even by just one per cent, would not be possible in every instance. But at least the exercise forces you to seriously consider what you spend your money on, what contribution it makes to your business and whether you’re getting maximum value for money. Continually monitoring expenditure and cutting unnecessary costs are both excellent habits to get into.
Time to focus on your prices. Good knowledge of your customers and competitors is vital, of course, but consider whether at least a five per cent increase is possible on some or all of your prices. Many businesses unnecessarily leave their prices set for many years for fear of losing customers, but this can mean needlessly throwing away profit. If you can enhance your product or service, you might even be able to achieve a greater price increase, providing you can explain how this gives your customers greater value.
Our friend from Northern Ireland recommended employing the “Five Per Cent Plan” at least every six months. Even a seemingly measly five per cent reduction or price increases here and there can seriously improve the profitability and well-being of all businesses, he said. That seems especially important in times like these. I’m sure he’d tell you that.