This is a guest post by Ian Hepworth, founder of independent finance brokers and cashflow finance specialists, Funding Solutions. Ian welcomes the increase in choice for borrowers, but encourages the industry not to get carried away with its own hype. There is still work to do.
There is a lot of press about alternative finance and ‘fintech’ and in a way the two have almost become synonymous. This ‘fintech’ revolution is certainly interesting and it covers a wide range of fundraising for businesses and private individuals from straightforward borrowing and equity raising, through to rewards and donations.
Alternative finance is defined as, “financial channels and instruments that have emerged outside of the traditional finance system such as regulated banks and capital markets”.
While this term seems to be a new buzzword, I would argue that in the asset-backed lending market, alternatives to regulated banks have existed for decades. There has always been a plethora of independent invoice finance and asset finance lenders that had specialities and capabilities that could help businesses when the high street banks could not.
FinTech is defined as, “new solutions which demonstrate an incremental or radical/disruptive innovation, development of applications, processes, products or business models in the financial services industry”.
As these terms seems to have merged together, for many, we are looking at financial channels that are predominantly technology lead. Concentrating on the business finance market, this predominantly provides unsecured loans and invoice finance.
If we look at why the technology is so important, I think the benefits are weighted heavily in favour of the lenders and the investors.
The lenders' main focus is to come up with a standardised procedure that is scalable so that they can achieve economies of scale. The upfront investment in technology, algorithms, testing and delivery will provide a standardised approach that will deliver simplified solutions to borrowers that can be easily rolled out to a mass market.
How does this technology impact on the businesses looking for funding?
For the actual borrower, I am not sure the benefits are that great other than slicker portals to submit information. In many instances, a business looking to borrow money is required to submit a full pack of information via the website or by e-mail. This will only be processed once all the information has been provided.
One of the leading peer-to-peer loan providers, for example, is very process driven with a team of accounts managers that collates the information. They do not review the information, they simply collate it and hand it to underwriting once complete. Clients often struggle to get three months' bank statements, so we will provide year-end accounts at the outset.
This can be frustrating for the client and the adviser, as it may mean that, although the first piece of information provided will clearly tell the lender that the applicant does not qualify for funding, the client will be chased for all the information before being advised of the decision.
A recent case in point was a security firm looking for £100,000. They were profitable for the last 2 years, but profits had decreased in the most recent year. The provider chased us and chased us for the bank statements. Once received, the deal was passed to underwriting and declined based on decreasing profits.
I am sorry to say that the front-end staff at a number of the new platforms are often poorly trained and have little knowledge of the product or criteria.
Agreed, once the platforms have full information, their decision making is quicker than with the more traditional providers, but only once the process is completed.
The standardised processes that deliver scalability are at the sacrifice of flexibility and in many ways remind me of the Little Britain sketch where the computer says ‘no’.
There was a big push to move away from the standardised credit policy of traditional banking to the more hands-on underwriting that delivers bespoke tailored debt solutions. Arguably FinTech takes us back to a more standardised approach in search of scalability and profits. For example, in my experience, the main invoice-traders only want to fund invoices to debtors with a turnover in excess of £20m.
So how significant is the FinTech market to the business finance industry?
I think in terms of offering businesses a wider choice of providers, new lenders in the market are always a good thing. My concern is with the hype surrounding this type of finance. If we compare the traditional invoice finance market and the invoice trading platforms, we can develop an understanding of how significant these platforms are.
In a report put together by Nesta and the University of Cambridge, the size of the invoice trading platforms were shown at £270m in 2014 with growth rates of 174%. This is quite an impressive stand-alone figure. However, when compared to the invoice finance industry regulated by the ABFA, it almost pales into insignificance. Total facilities made available by the traditional invoice finance lenders at the end of 2014 were close to £40bn.
I would also further question the size of these platforms because of the way they represent their lending figures. By way of an example, if a traditional invoice finance lender agrees a facility of £100,000 for a client with 30-day invoice terms, it would expect the facility to revolve each month with old invoices being paid and new invoices being raised. This would be reported as £100,000 of lending. The platforms show each new invoice being funded as ‘new lending’ so, using the same example, their figure would likely be disclosed as £1.2m.
As you can see, it may be that the equivalent total advances at any one time from the platforms in 2014 were in fact only £22m compared to total advances from ABFA member of £20bn. This would make the platforms just 0.11% the size of the more traditional invoice finance market.
The BBA shows that banks advance £485bn to businesses compared to the £2.4bn from P2P business lending in 2015 reported by the Liberium Index and AltFi data. Similarly the FinTech alternatives are just 0.5% the size of the more traditional market.
After the banking crisis, it was argued that funding was not available to many businesses. This was due to a mixture of liquidity within the banking sector and dropping security values in the property and asset finance markets. The invoice finance market weathered the storm well as lending continued as normal although credit limits on customers were harder to come by.
In 2012, Vince Cable announced that the Government would be creating a Business Bank to help channel lending to businesses. In part, it did this by channelling funds through partner platforms such as Funding Circle, URICA and Market Invoice.
The Government obviously wants to provide alternatives to SMEs, which is laudible and these platforms do offer genuine solutions to a lot of businesses. However, the government also wants the perception to be one of great success. As a result, while the delivery of finance from the platforms is relatively small, the publicity levels are sky high.
Don't get me wrong. Alternative Finance and FinTech has a significant role to play and for the right proposition, it can be absolutely the right answer. Our role as a commercial finance broker is to help our clients navigate a course between the traditional and the new. Our knowledge of which provider is best suited to an individual client's requirements is invaluable when it comes to the time it saves in avoiding the cul-de-sacs of mis-directed and ultimately frustrated applications.