Jason Tebb of Go Develop explains how recent issues with peer-to-peer lending have highlighted the need to do research when funding a new project.
Peer-to-peer lending (P2P) continues to be an extremely popular solution for companies that are looking for construction finance.
Online alternative funding (in large part P2P) rose from £3.2bn in 2015 to £4.6bn over the next 12 months – an annual growth rate of 43 per cent.
Explanation
The reasons behind this growth are relatively clear. What might be termed ‘conventional’ lending sources, such as the major banks, have not always necessarily made an effective transition to this new fast-moving business world. Some continue to be risk-averse, relatively inflexible, and weighed down by bureaucracy when construction borrowing propositions are submitted.
The end result of all of that can be extended delays in getting a decision, and an iterative process that can sap the enthusiasm and energy of the company seeking the finance. It can also lead to the commercial opportunity disappearing due to delays in approvals etc.
In contrast, P2P lending is available online, is fast, dynamic, and typically entrepreneurially-oriented. It is therefore no real surprise that potential borrowers are attracted to it.
Caution
However, there are issues for borrowers and investors to be aware of in this marketplace, as illustrated by recent events with one such lender.
Featured and promoted as an illustration of modern P2P techniques in various media sources, the platform has recently received less favourable media exposure due to a threatened legal action against it and its investors for several million pounds.
The issues behind this legal action are many and complicated. They essentially relate to claims from borrowers that the sums agreed were not released on time, and that insufficient notice was provided when calling in loans for repayment. It is reported that 5,000 investors are involved, who lent a combined £8.2m.
The FCA’s involvement
The company in question has publicly stated that it has not asked for assistance from the FCA (Financial Conduct Authority) and has only held a routine scheduled meeting with them, but some of the press coverage and critics have interpreted the meeting differently.
This isn’t the first time the FCA has become involved in the rapidly growing P2P marketplace.
Earlier in 2018, they published a report expressing concerns about aspects of the P2P lending environment, including some relating to investor protection. They specifically raised the issues that the P2P landscape is very complex, there can be a lack of communication, and the management of risk could be improved.
It might well be the case that more direct and regulatory FCA involvement in the P2P domain is something to be anticipated in future.
Analysis
P2P lending is an extremely important part of today’s UK construction funding environment. There is no suggestion that this should be otherwise, or that major problems are likely to become the norm.
However, it seems equally clear that there remain certain concerns relating to the suitability of this mechanism for some types of borrowers, and equally importantly, whether the interests of investors are being adequately protected.
In situations where you might be seeking flexible borrowing in support of a construction project, it’s highly advisable to do your research thoroughly in advance. That should not be simply a question of looking at a variety of P2P funding platforms, but considering alternative options, such as full joint venture funding.
In addition, consider the nature of the solution provider. One of the things that borrowers should be seeking is a professional business-as-usual and trauma-free engagement with the provider of their funds. It’s therefore important to be certain that the funds provider is ‘running a tight ship.’
During these uncertain times, with Brexit on the horizon, it has never been more important for housebuilders to choose a funder for the long term, one who is invested in seeing a development project from its initial plans through to completion. Joint ventures certainly have this advantage.
Summary
Potential borrowers are fortunate in the fact that the lending marketplace is now more diversified and dynamic than it has ever been before. However, that very diversity can bring with it risks and issues which have been highlighted in some of the events in the recent media reports.
The bottom line is that housebuilders must look around at all the options rather than simply defaulting to the P2P environment. Hunt out flexible, sustainable funding that fits you and your project. It does exist.
Jason Tebb is COO at Go Develop