Peer-to-peer lending is rapidly penetrating the SME market, and its drivers are discernible as a cluster of related and traceable factors that are making the new lending channel particularly attractive right now.
My recent peer-to-peer SME lending study focused on elements of the UK SME economy that peer-to-peer lenders are reaching, the demographics of those companies, and their risk profiles.
The continually spreading use of the internet into more and more services and areas of life, combined with emerging technology has enabled effective, low-cost and highly-reactive alternatives for connecting borrowers with holders of capital.
Since the 2008 economic crash and the further recession, there has been an increased regulatory burden on established banks that has reduced their risk appetite in the SME space. This has been widely covered in the media and been the subject of debate by Parliament. Nevertheless, SMEs still require external funding as they look to expand and thrive.
Peer-to-peer lenders’ ability to attract investors parallel the pain being felt by savers, whose return rates have been devastated by quantitate easing. In addition, the variety of business models among peer-to-peer lenders feature a variety of origination channels. This maximises reach across the SME spectrum.
With all these drivers occurring in parallel, peer-to-peer lenders have easily penetrated the parts of the SME lending landscape that have been vacated by traditional banks.
Who is using P2P services?
In addition to market dynamics, I analysed the SMEs being served by peer-to-peer platforms. Using data from Thin Cats and Experian’s wider information on this SME economy the study was broken down into demographic, performance and risk profile.
It’s a market dominated by micro-enterprises and of all the SME data recorded within Experian’s information, the majority have only up to four employees. It is also a market with an extremely dynamic population, even if yearly totals of live firms seem stable: A majority either cease trading or are born over a typical seven year period!
Although Thin Cats’ data shows that it lends at scale to companies with up to four employees, with this SME profile comprising 49 per cent of all the companies on its books, the business’ highest success rate is among mid-sized companies with 20 to 49 employees: 18 per cent of Thin Cats’ SME customers are at this size, though this size band comprises a much smaller proportion of the universe population.
Experian’s data shows that this peer-to-peer lender is very focused on mid-level risk, i.e. under-represented among the very strongest balance sheets (where the mainstream lenders still operate), but importantly, with a normal proportion of poor risks (i.e. comparable to market levels overall), but over-represented in the middle category of acceptable risk. Its borrower base is also heavily over-represented among growing firms.
Experian’s data can also reveal the sectors in which the levels of SME peer-to-peer lending are at their highest. This P2P lender has the highest success in manufacturing, and in the Midlands – reflecting the origination process of this platform. Typically, the P2P borrowing companies are neither very young nor very old, peaking in the 5 to 15 years old age band.
What do we know about lending recipients?
Peer to peer lending is most effectively reaching a highly specific set of demographics. The results summarised here reflect one particular platform, but it is highly likely that the market footprint of specific other platforms will be just as specific, yet complementary: e.g. reaching different size bands, different sectors, different regions.
The highest success rates are among medium-sized and established firms. Those with reasonable balance sheets and firms that are delivering growth and other positive behaviours such as adaptiveness, international activity and productivity also secure funding. In the case of Thin Cats, customers are 10.22x more likely to be importers and exporters. The research based on the invoice-payment data collected by Experian shows that some borrowers may suffer from ‘supply chain squeeze’, showing that they are more likely to have unpaid invoices.
With established banks looking at moving into peer-to-peer lending as well, either through acquisition or creating new platforms, the market may face further expansion and increased competition.
The data used in the research was made available by peer-to-peer platform Thin Cats, the UK’s second largest SME peer-to-peer lender, and Experian pH’s information on UK SMEs. Thin Cats had granted 400 loans worth £200m to customers. The research focused on Thin Cats’ business lending which accounts for 70 percent of those 400 loans.
Rolf Hickmann, founder the pH Group, part of Experian