On both sides of the Atlantic, several factors have contributed to the growth in popularity and use of peer-to-peer (P2P) lending among both small to medium enterprises (SMEs) and larger corporates. The agility of accessing finance, flexibility in contract lengths, the transparency of fees and an emphasis on risk management have all positively influenced organisations’ attitudes towards P2P platforms.
Regulation has also played a role in changing attitudes towards P2P lending. Accredited independent bodies’ acknowledgment of P2P lending’s value has inspired confidence in both the SMEs using these platforms and the investors funding them. In the UK, one of P2P’s most developed markets, the Financial Services Compensation Scheme (FSCS) – whose declared remit is as the compensation fund of last resort for customers of authorised financial services firms – announced in April that P2P lending advice will be covered within its umbrella, with eligible investors being covered for losses of up to £50,000 (US$65,000).
SMEs and corporates are becoming more educated on the funding solutions available to them, but further education on identifying what solutions work best for different sectors still needs to be done.
Single invoice trading works particularly well for SMEs, especially those working with larger organisations. Invoice trading is a flexible way for SMEs to release working capital by auctioning their invoices on trading platforms and for funders to buy at a discounted rate and gain fast access to working capital. Some platforms are even able to facilitate working capital to SMEs within 24 hours.
The invoices that SMEs are due to be paid by their clients can vary in size and length of payment terms ranging from 30, 60 to 90 days. A recent survey of UK businesses by Lovetts Solicitors found almost one in four are, on average, being paid one to two months late. This inevitably has a detrimental effect on a business’s cash flow. Larger organisations usually opt to pay at the 90-day mark. With established financing support from banks these corporates are able to take advantage of demanding longer payment terms to benefit their cash flow; something that often isn’t an option for small or medium sized businesses.
Sixty per cent of credit personnel within these smaller UK firms surveyed by Lovetts said they wouldn’t act on late payments out of fear of upsetting customers and tarnishing their reputation. Protecting customer relationships is a major concern for SMEs and many fear claiming late payment compensation will strain vital working relationships.
The benefit of invoice trading allows SMEs to work and invoice large lucrative corporations, without having to wait for payments on their terms, allowing them to use working capital for re-investment back into the business and for promoting growth. Invoice trading works well for small and medium sized businesses supplying a service or product, which can auction invoices as and when they need to, but for business that rely on a steady supply chain consistency is key.
Some players in the P2P market offer supply chain finance (SCF) products that allow businesses to pay their supplies in advance, to protect the delivery of goods essential to generating capital. One sector that has taken advantage of these platforms is the construction sector. There is evidence that an increasing number of construction firms use SCF to secure the delivery of fixtures and raw materials, needed to complete projects on time in order to be paid. It is common for construction contracts to be paid in full only when the build is complete; so having a consistent flow of working capital to fund the completion of a build allows these construction companies to focus on finishing a project on time, rather than sourcing funds for materials.
Regulation and confidence
Due to the flexible nature of peer-to-peer lender platforms they are able to provide the facilities SMEs need to realise growth without compromising existing financial commitments. Accessing working capital can be challenging for SMEs. A recent joint report by Misys and TMI, ‘The Needs of SMEs: Working Capital Challenges and Digital Solutions’, highlights a discrepancy that small to medium-sized businesses experience globally when it comes to accessing finance.
The research across 100 SMEs with annual turnover of up to $1bn in the US, Europe, the Middle East and Africa (EMEA) and Asia Pacific (APAC) shows that 28% are finding finance more difficult, while an increasing number – up by 9% in the past 12 months – are increasingly relying on alternative finance. According to the report, close to 38% of SMEs that do seek traditional bank funding will be turned down, and as a result businesses have explored the growing funding solutions coming to the market to integrate with their existing finances and bridge their funding gap.
Already 24% of SMEs use a combination of traditional and new models of finance to meet their funding needs and as time goes on, more companies are expected to adopt a combined approach to their finances. The report makes clear that to compete with alternative finance options, banks need to step up to the challenge and digitalise, provide automation and multi-bank connectivity. It also appears that some forms of non-bank finance, such as single invoice finance and SCF may just be the most logical choice. Traditional banking is trying to emulate the transparency of P2P lending platforms; Basel III is an example of banks trying to compete or rather catch-up with the agile platforms.
Based on more than 35 plus years’ experience in the industry this writer is convinced that regulation instils confidence. Currently the P2P lender sector is self-regulated, apart from small pools of providers banding together to form codes of conduct and best practices. The sector offers a wide range of funding solutions, so regulation will have to come from someone with knowledge, power and a readiness to take tough decisions who can protect both the businesses and the funders. Ideally in the UK regulation would come from the sector watchdog the Financial Conduct Authority (FCA) or another independent authority. This would offer all parties collaborating with these platforms security and confidence that they are operating at an ethical and standardised level.
Regulation could also open up the sector to more collaboration with banks. As it stands many P2P platforms offer products that are complementary to traditional bank finance. If lenders within the sector can be regulated with some form of standardisation it would offer banks a way to vet potential funding partners. This would allow banks to refer businesses they previously couldn’t fund to the flexible platforms, produce more financing solutions for businesses and greater funding opportunities for investors.
The collaboration between banks and P2P lenders would stimulate sectors of the economy in a fresh approach to business finance and this is the way forward for the future of business funding solutions.
Supply chain finance (SCF) at its surface can appear to disrupt supplier relations and the status quo. Thus, it’s critical for treasury to champion the value of SCF cross-functionally, and the strategic value it delivers in way of specific capital allocation commitments, EBITDA guidance, or free cash flow targets previously committed by the CFO.
For UK treasurers looking to manage financial risk within their organisation, recent news of an interest rate rise from 0.25% to 0.5% was a mixed blessing.
Despite their importance to the world economy, SMEs often face problems accessing credit when and where they need it. Their banking needs are often more complex than the usual retail banking customer and they don’t offer banks the revenue potential of larger corporations.
Whether responding to questions from other stakeholders or seeking to monitor the effectiveness of their risk management processes, treasurers and FX managers in growing companies with expanding foreign currency exposures need solid analytics to support their decision making.