As promised last week, I’m going to return to the subject of rising interest rates in a moment, but first for those interested in equity crowdfunding I should mention a lunchtime roundtable on June 23^rd that is being organised by the Centre for the Study of Financial Innovation. I’ll be taking part in a panel discussion on the future shape of equity crowdfunding along with representatives of several platforms plus legal and regulatory experts. It’s free to attend though places are limited. It takes place at Wax Chandlers Hall, 6 Gresham Street, EC2V 7AD from 12.30-2.15, and you can find out details and register by emailing [email protected].

 

But now back to interest rates. If rising rates in the wider system don’t pose an immediate threat to the platforms’ business model and we accept that there is scope for returns on other assets to rise a fair bit before they start to lure lenders elsewhere, what might they do to demand among borrowers for debt finance from P2P platforms?

 

By common consent, business borrowers using P2P platforms today do not seem to be particularly driven by the price of their loans. Graeme Marshall, CEO of Funding Knight says that on his platform “we get good quality borrowers because our credit processes are quite tough and we don’t find we lose deals because they say our interest rates are too high.” Average rates hover around 10% on Funding Knight and are if anything slightly higher on Thincats, but the story is the same among borrowers there too, says CEO Kevin Caley. “If they’ve got a project that’s going to earn them a 30% return on their investment, they need to know they’ve got the money and if they’ve having to pay 12% rather than 8% that’s not necessarily a big deal.”

 

He argues that while lenders tend to be very focused on interest rates, borrowers – at least in the current conditions – are much more concerned about the availability of funds: can they get hold of the money they need at all?

 

So rising rates won’t necessarily kill off demand for P2P loans. Much depends on what effect they might have more generally on the availability of funds to lend. If they encouraged more lenders to enter the market and so increased the supply of loans (for example by allowing banks to widen their margins) that might have an impact on the P2P platforms’ ability to attract borrowers. If they tempted money away from SME lending towards other activities, that could reduce availability and underpin pricing. In practice, both processes are likely and the effect will be determined by the balance between them.

 

All that said, Graeme Marshall is sceptical that rising rates would in fact tempt banks back into areas of the SME market that he argues are simply uneconomic for them under current regulation due to their high capital weightings. That’s not to say that others wouldn’t be tempted; it simply suggests that the biggest and most obvious suppliers of loans to SMEs might not be.

 

The other big issue, of course, is what effect rising interest rates might have on levels of default (on which subject this presentation .

 

by Gareth Rumsey of Experian at the AltFi European Summit in February is worth a look). Most small businesses borrow on fixed rates so provided they don’t get into cash flow difficulties in the meantime, the pinch comes when they need to refinance. As long as P2P operators concentrate on lending to well-run companies with good quality cash flow, they will have a decent chance of weathering a spell of rising interest rates without necessarily seeing a big impact on their levels of default. What looks risky to me is a dash to expand a lending book by accepting lower quality borrowers which runs face-first into a spell of rising interest rates that will start to increase these companies’ cost of finance from other, better secured sources. That could end up looking messy and that, to my mind, is the main thing for platforms and their funders to worry about when rates start to move.

 

 

Footnote: Some readers will already be aware that I am a shareholder in Platform Black, the invoice trading and supply chain finance platform. In the interests of transparency, I should also disclose that I hold much smaller stakes in the property platform Relendex, GLI Finance Ltd, and that I have just become a shareholder in Syndicate Room as part of their recent offering.