A new wall of money for alternative finance

THE concept of crowdfunding is new, and businesses need to be educated that funding is available from alternative sources, but in the UK, where government regulators are moving to effectively support the industry’s expansion, some expect turnover to reach  £5 million this year and up to  £8 billion in 2016 . . .

A WALL of private and institutional money is said to be banking up to offer alternative finance to businesses looking for working capital and short-term loans of up to five years. The money is going into debt funds and crowdfunding platforms dedicated to business lending.
Alternative financing, such as crowdfunding, is still in its infancy in Australia. But in coming months, a new world of business lending is poised to open up to Australian SMEs.
A leading British commentator on alternative finance, David Stevenson, Executive Director of AltFi Ltd, told ATI: “I know of at least two hedge funds and a mid-sized British investment bank looking to go into Australia.”
British crowdfunder ArchOver is also looking to expand to Australia in the foreseeable future.  ThinCats was the first British crowdfunder to establish a presence last year. It has now begun offering loans.
“Australia is a very interesting market,” says Ian Anderson, a Director of ArchOver, explaining that, like all Commonwealth countries, Australia’s accounting and legal systems are similar to those of the UK. “Australia is a market we have our eye on. We see Australia as a natural stepping ground,” he says.
Sunil Aranha, Chief Executive of ThinCats Australia, told ATI that, since February, the company has made loans totalling AUD1 million. Its loans start from AUD50,000 and can be as much as AUD2 million. “We offer simple fixed interest or variable rate loans for two to five years,” says Aranha, who has 25 years of international and local SME sector banking experience in general management roles with Citibank, EFIC and Commonwealth Bank.
ThinCats targets three types of SMEs. The first is those unable to borrow from banks because they have run out of real estate to offer as security. ThinCats offers top-up loans.
Then there are start-ups. “We fund start-up companies where we are comfortable with the business plan and the experience of their Directors. In these instances, we take personal guarantees for security.”
The third group is companies which typically require $50,000-$100,000 — amounts considered too small for banks.
“We take personal guarantees and business assets, such as receivables and inventories, as collateral. The crowd takes the default risks.”
Crowdlending offers an alternative to loans from short-term lenders who charge two per cent to four per cent a month — up to almost 50 per cent a year — for a the facility. ThinCats sets its interest rates at the level of an overdraft, usually between 12 and 18 per cent.  But ultimately, it is the crowd that determines the interest rate during the auction to fund the loan.
Among ThinCats’ borrowers is a building project company which requires extra funding to undertake a new big contract. This company took out loans of AUD100,000 on two occasions from ThinCats.
Others include an online auction house, which required AUD60,000 for marketing and search engine optimisation, a supplier of solar panels to shops and hospitals, and a builder of granny flats.
Aranha says brokers or accounting firms, to whom it pays a one-off commission of 0.6 per cent of the value of the loan and a trailing commission for the life of the loan of 0.15 per cent, refer some SMEs to ThinCats.
The ThinCats crowd is made up of more than 200 high net worth individuals. They receive monthly repayments.
Australia has around half a dozen peer-to-peer platforms, like SocietyOne, which counts Westpac Bank as one of its investors, and makes small personal loans. But, so far, ThinCats seems to be the only operating crowdfunder catering specifically to businesses.
Stevenson says development of the industry in Australia is probably 18 months behind the UK. “I expect Australia to follow the UK example. Growth in the UK has been exponential, at 10 to 20 per cent a month, but growth in Australia will come from a lower base.”
Both Stevenson and Ian Anderson agree that there is strong institutional interest in alternative finance.
Stevenson says hedge funds, asset and wealth managers and a small number of investment banks looking for higher returns are those most interested in working capital, invoice funding and short-term one-year facilities or fixed term loans for three to five years.
“I am aware of four funds which are raising £1 billion (between them) on the London Stock Exchange,” Stevenson told ATI, adding that the British market is still only one tenth of the size of the market in America.
The UK and the US are two of the most advanced markets in the development of crowdfunding and peer-to-peer lending. China is also active, but it works on different lending models.
Anderson says the concept of crowdfunding is new, and that businesses need to be educated that funding is available from alternative sources. He works with groups like Chambers of Commerce to disseminate information about crowdfunding. “In the UK,” he says, “people are starting to become aware of what crowd funding is as an industry, and the various crowd-lending products that are now available.”
But it is still necessary for crowdfunders to work with finance brokers, accounting firms and even banks. Because of regulations and prudential requirements, Anderson says banks might not think it worth their while lending to a company that wants to borrow even £500,000 or £1 million. But they still want to maintain a banking relationship with the company, and they will refer those customers to a crowd-funding platform.
“We work with two different banks which have introduced their customers to us,” Anderson says, adding that the UK Government plans to bring in regulations requiring banks to pass on lending opportunities to crowd-funding platforms. He credits the Government with having introduced measures that pave the way for the crowdfunding industry, driven by its desire to create additional funding sources — particularly for small businesses.
Under new banking rules, Anderson says, banks are required to have more capital reserves against small business lending, and that means it is becoming even more difficult to obtain bank finance. In a highly significant move, the State-owned British Business Bank has said that, for every £20,000 raised from the crowd, it will match pound for pound.
As well, from next year the British Government will permit tax-efficient Individual Savings Accounts (ISAs) to put money into peer-to-peer lending, and this year, in the Government’s latest move to bring alternative finance into the mainstream, the British Chancellor has flagged a move to expand ISA-approved investments to include equity and loan crowd-funding.
As Anderson sees it, UK authorities are trying to get the regulations right so that they minimise damage to investors, yet do not hamper the industry from developing further.
The first peer-to-peer platform, Funding Circle, was launched in the UK five years ago. The first peer-to-peer platform in the US is Prosper, launched in 2006.
Anderson says the forecast is for the U industry to reach £5 billion this year. “But I expect it to reach £7-£8 billion,” he told ATI.
However, Stevenson is more conservative, saying that more likely total lending for this year is £2- £3 billion, with the majority of loans going to consumers, and perhaps 35-40 per cent going to business.
ArchOver set a record in July with a £1 million loan. It is currently working on loans totalling £17 million. “Our model is different from others in the industry. We work with account receivables of a company and its growth prospects. We do a floating charge on the receivables and take out credit insurance to protect against defaults,” Anderson says.
Typically, most crowdfunding platforms work with a large crowd putting in small individual amounts. For example, the average investor put £167 into loans (average size £60,000) made by Funding Circle, one of Britain’s largest crowd funders. By comparison, ArchOver works with a small crowd, and its average loan for borrowers is £250,000.
The average investor is £5,000 per pledge against these loans and £75,000 for institutions.
Anderson says liquidity is an issue, and that most platforms deal with it by having their own internal markets offering the crowd an opportunity to cash in their loans.
ArchOver has formed a partnership with a company known as Asset Match, a platform that provides a market place for private companies to sell shares in private companies. This enables the ArchOver crowd to sell loans to third parties.
In a recent research note, Morgan Stanley forecast that peer-to-peer lending in Australia would grow to AUD22 billion by 2020.
Stevenson declines to make a forecast so far out, but agrees that peer-to-peer will continue to grow. He adds that there are three factors that could interrupt growth.  “Firstly, if there is a recession, because defaults will rise; secondly, if interest rates jump by two to three per cent; and, lastly a regulatory clampdown on the industry.”