Peer-to-peer lending to businesses is on the verge of overtaking lending to consumers as investors chase higher returns available from more risky business loans.
Cumulative P2P consumer lending stood at £1.583bn, while lending to small and medium-sized businesses totalled £1.581bn as of June 16, according to the AltFi Liberum Volume Index.
Business lending is on a steeper growth curve, partly driven by the rapid entry of institutional lenders into the sector; it reached £500m of cumulative loans in mid-2014, almost a year after consumer loans reached the same point.
The figures point to the changing complexion of an industry which began with consumers on both sides of each loan but has diversified as its growth has accelerated over the past three years.
“The returns are a major component — lending to businesses and property lending do produce a higher coupon but perhaps with more volatility and more risk. There are also much larger loan sizes,” said Stuart Law, chief executive of Assetz Capital, a top-three P2P lender to businesses.
He expects growth to accelerate further. “In terms of business lending, you ain’t seen nothing yet,” he said.
New entrants have played a part in the lending expansion: five new business lending platforms qualified to enter the index in the past year, bringing the total to 16, against five in total handling loans to consumers.
Unlike banks, P2P platforms — also known as marketplace lenders — do not take loans on to their own balance sheets but serve as a venue for lending and carry out credit checks in exchange for fees.
Those which arrange loans to companies have leapt into a vacuum created by low levels of bank lending to small and medium-sized businesses, especially since the financial crisis.
“The options available to small businesses have historically always been narrower than for consumers. The four major high street banks account for 90 per cent of small business lending,” says James Meekings, co-founder of Funding Circle, the largest P2P business lender.
However, he said there is a “long way to go” in building business awareness of peer-to-peer, indicating further room for growth.
Sam Griffiths, managing director at Altfi Data, said: “The factor limiting growth for most large UK P2P platforms now is supply of borrowers, not supply of lenders.”
Yields from the three largest P2P sites — Zopa, which handles only consumer loans, plus RateSetter and Funding Circle — are currently averaging an annual 5.15 per cent, down from a peak of 6.3 per cent in March 2011, according to the AltFi Liberum Returns Index.
But Funding Circle, which handles only business loans, is currently offering estimated annualised returns of 6.7 per cent after fees and bad debts.
Most of its lenders opt automatically to diversify their lending between slices of many loans, but they can also choose to finance whole loans; within these, they can choose higher-risk loans paying out higher-than-average yields.
Institutional investors in particular tend to favour higher-risk, higher-return investments via loans to small businesses or property, Mr Griffiths said.
Two new London-listed investment trusts, P2P Global Investments and VPC Speciality Lending Investments, have raised £650m over the past year to invest in peer-to-peer. Fixed income fund managers have also been buying P2P debt, while banks are in talks to lend through the platforms. A third new trust, Ranger Direct Lending, is looking to the US for loans initially, but may later broaden its scope.
In parallel with institutional money, investment by individuals in business loans is still increasing, according to Funding Circle. RateSetter, one of the biggest P2P platforms, extended its offering from consumer to business loans late last year, and businesses now account for 16 per cent of its outstanding loan book.
Within the rise in business lending, there has been a steep increase in secured loans over the past two years. Cumulative property-backed lending to businesses has now topped £600m, according to AltFi Data.
The industry is expected to undergo a transformation in 2015 when P2P investments become eligible for the individual savings account (Isa), a popular tax-efficient wrapper, leading to an influx of retail money.
However, there are risks associated with a sector most of which has not been tested during a major downturn. Investments via peer-to-peer are not eligible for the Financial Services Compensation Scheme, and the loans can be illiquid.
P2P investment trust Isas launch next month
Investment trusts that buy peer-to-peer loans will be eligible for inclusion in individual savings accounts (Isas) from July 1, the government has announced, ahead of changes that will allow direct investments in peer-to-peer lending through the tax-efficient savings format.
The trusts have proved popular since the first one, P2P Global Investments, began trading last year, although many retail investors access them through a multi-asset fund. P2P Global — which already has a market capitalisation of over £200m plus £250m of C shares — announced on Thursday it would issue another £250m of C-shares.
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