BLOG: Alternative Finance – The creation of a peer to SME platform
What is peer to peer lending and what can it do for investors? Mark Hawkins of Invest and Fund Ltd gives his views.
I live in a town on the South Coast. The age demographic is above that of the national population. Fifty years above that of the national population.
The question I am most frequently asked is not as Adman, Adman, Bowtie and Spectacles would have you believe, “Would you like a Werther’s Original”, but rather something far more pertinent to their own lives “Do you know where I should put my savings to get a decent rate of interest”.
It is hard to advise anything if an account with the recognised High Street Banks or Building Societies is required. Deposit account rates are anaemic, and even shielding the tax element of their savings through a new ISA, does little to improve the return, or requires fixed long-term investment, something that may not be suitable for these savers.
Equity markets may also be equally inappropriate, short term volatility needs to be avoided, and hedging is too complicated and expensive.
For the past 30 years I have worked as the financial director of several SMEs in different industrial sectors. I’ve experienced banks desperately wanting to loan money, I’ve suffered base rates in double figures for many years, I’ve seen personal relationships with bank managers replaced by computers and I’ve watched good professional banking personnel converted to salespersons. More worryingly, I’ve experienced first-hand, banks removing lending to SMEs almost overnight due to an economic collapse largely of their own making.
This left me with two questions.
1.How do SMEs raise finance
2.How do savers get a real return on their lifetime savings
Now what to do about it.
The answer was quite obvious, put the Individual savers in touch directly with the SME borrowers. Let them lend money directly to SMEs, but do it through an exchange that brings lots of individuals together to loan small amounts which in aggregate provide the funding the borrower needs.
Create a marketplace where individuals can see for themselves which businesses require funds and for what purpose, and allow them to state what rate of interest they would like to receive.
The marketplace must be clear and simple, and there must be a minimum of administration and bureaucracy.
The borrowers must be vetted and proper due diligence undertaken to ensure the risk in the loan is minimised, and the saver must be able to have a way of getting their money out if and when required. Savers must have confidence.
For the borrower, the application process should be quick, intuitive and simple, SMEs still have a business to run and will be very hands on with all of the day to day complexities of that business. They won’t have treasury departments or finance committees, more often there will be persons who split their time between factory floor activity, dealing with customer and suppliers, evaluating new products and probably late in the evening looking at invoices. They don’t have time to jump through the hoops banks provide only to be given a resounding ‘no’ after three months of the financial equivalent of a Crufts’ agility test.
The process of creating an exchange to help borrowers raise finance and investors to receive a decent return by using modern technology to ‘crunch the margins at both ends’ had begun.
From all of this, we have created a platform that is now open for business and operating in an industry which is currently growing at 75% per annum, with that annual growth rate accelerating.
We operate in the Alternative Finance market, where alternative simply means choice, but as banks aren’t lending to SMEs or giving their depositors a proper rate of return, maybe Hobson’s Choice would be a better description.
Mark Hawkins is co-founder and financial director of Invest and Fund Ltd. To find out more visit: www.investandfund.com