Adam Williams at the Telegraph wrote a telling article yesterday highlighting the significant challenges confronting the peer to peer lending sector.
Zopa and Funding Circle, have shifted their business models amid concerns over the viability of peer-to-peer lending.
Zopa has gained a banking licence and plans to diversify away from the sector. The firm said it would no longer lend to riskier customers and had significantly tightened its lending policy and Funding Circle has paused Peer to Peer Lending.
The deluge of losses for investors from poor lending decisions is only just starting to bite so watch this space in 2021.
From an SME perspective, Peer to Peer and specifically the Alternative Lending Market have on the whole been good for UK Businesses. The sector provides much-needed cash for investment and working capital, especially for SMEs. The High Street banks have, for many years, miserably failed SMEs, and there is no doubt the sector provides an invaluable service to many businesses.
Given the regulatory regime that all directors need to abide by, there can be sound financial and corporate governance rationales why a board of directors confronting insolvency would seek to refinance rather than restructure via formal insolvency. Furthermore, given the risk of post liquidation investigation and clawbacks by Liquidators, it made absolute sense for some boards to refinance.
However, I am concerned that too many Zombie businesses were kept afloat by poor lending decisions that should have used a formal insolvency process to restructure.
Additionally, given that directors are signing personal guarantees to secure the lending, they are taking extraordinary risks in potentially transferring a corporate debt and liability to themselves personally, it negates the whole concept of Limited Liability.
1.2m businesses have to date benefitted from loans and guarantees worth £52.65bn through schemes delivered by the BBB, includes 1,174,854 Bounce Back Loans worth over £35bn, 60,409 facilities worth almost £13.7bn through CBILS and 516 facilities worth £3.5bn through the CLBILS.
The Perfect Storm
The UK deficit hit £2 Trillion in July 2020, and UK PLC debt now stands at 100.5pc of GDP, levels not seen since the 1960s!
Suppose the V-shaped recovery does not materialise and the deficit drives inflation up. In that case, we could end up with depressed demand, and with CBILS due to end on the 31 December 2020, combined with tighter risk-based lending criteria the perfect storm of insolvency looks increasingly likely at the end of 2021 for SMEs.