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Marketplace lending: The new investment frontier
Imagine if your investment not only reaps dividends for you – but the backbone of the Australian economy.
Marketplace lending: The new investment frontier
Imagine if your investment not only reaps dividends for you – but the backbone of the Australian economy.
Rarely do we have opportunities to build a portfolio of interests that deliver far-reaching benefits for both ourselves as investors as well as other enterprising Australians.
When we think of investment opportunities, there are a few that immediately come to mind:
· Cash - low-interest rates in recent years, however, indicators are pointing towards a rise;
· Property - historically, property has been a popular choice for Aussies with its real security. 2017 saw the market slip from several years of significant gains with new policies designed to safeguard property prices and debt levels;
· Bonds - better returns than cash, but still moderate; and
· Stocks - Australian shares produced an average annual compound return of 4.3 per cent over the 10 years to the end of last year.
Historically, as an investor, you’ve been able to leverage your investment portfolios towards business debt, equity and so on.
Marketplace lending, also known as peer-to-peer lending, is the biggest rising star in this landscape.
Australia’s economic landscape
Australia has one of the highest numbers of small businesses per capita with more than 2.2 million SMEs. Our small to medium business sector accounts for 68 per cent of all industry employment and 56 per cent of industry gross value added to the nation’s economy.
This means that a diverse, agile and robust SME sector is critical for the future resilience and growth of the country.
According to the Australian Bureau of Statistics, the main reasons SMEs seek debt or equity finance are, and in no order, to maintain short-term cash flow, replace or purchase equipment or machinery, to ensure the survival of the business or to expand the business.
However, CPA Australia reports that less than half of the 508 small businesses surveyed in 2016 found it ‘easy or very easy’ to access external finance.
Our economy needs both sustainability and growth - and for that to occur our SME sector needs access to a greater range of finance opportunities.
The emerging investor opportunity
While our economic engine room is seeking its own solution, Australian investors are seeking to leverage their portfolio.
Marketplace lending brings together businesses needing cash to grow, with investors looking for better portfolio options.
Never has there been a better time to bring together SMEs and investors towards their collective growth. Australia is a perfect location for marketplace lending thanks to a highly concentrated banking market, large price umbrella, high input costs (real-estate and labour), and widespread adoption of mobile devices and cloud-based accounting software.
An ASIC survey of marketplace lending providers confirmed there was a 509 per cent increase in the number of SMEs using marketplace lending from 2015-16 to 2016-17.
In 2016, the Australian alternative finance lending market (including balance sheet lenders, peer-to-peer and invoice financing) reached $355 million, up from $231 million in 2015. Alternative finance options for Australian SMEs continues to gain momentum – tipped to reach $11.4 billion by 2020.
Marketplace lending
Thanks to emerging technologies and an ever-evolving finance industry, the opportunity to access and invest in Australian business has changed dramatically.
As a savvy investor, you’re seeking innovative alternatives to generate better risk-adjusted returns.
With marketplace lending, borrowers benefit from convenient access and fast service. Investors can earn attractive returns with regular, annuity-like payments by selecting a broad and diversified portfolio of loans, spreading risk across multiple borrowers. Together this creates a new fixed income asset class.
Borrowers apply through the lending platform, and investors review available applications on the lender’s website to identify borrowers they would like to fund, in part or in full.
Key considerations
Choosing the right marketplace lending partner is the first step to reaching your goals with your investment portfolio.
Ensure your marketplace lender offers data-driven insights for you to make well-informed decisions. The more data you have, the more informed choices you can make on what will be an appropriate loan to suit your risk appetite.
Look for a lender aligned with your interests and understand the marketplace’s risk appetite and policies and processes are in place to recoup funds lost through defaults. For example, Bigstone sets aside 2 per cent of the face value of each Loan in a provision fund. The provision fund is set up to help compensate investors if a borrower defaults to help protect their capital investment. Bigstone also co-invests in every loan; we like to think of it has having our skin in the game alongside our investors.
Marketplace example
What does a marketplace look like?
The information investors have access to about the borrowers and loans available for funding will likely vary between lending platforms. Using sample data from the Bigstone marketplace, investors can see information about the loan, including loan purpose, amount and term; and information about the borrower, like how long the business has been operational and whether there are any prior bankruptcies.
Underpinning the Bigstone solution is a propriety credit system. Our credit model has been built knowing where the traditional credit provider systems have failed.
Bigstone:
· Analyses cash flow and regularity of incoming and outgoing payments;
· Reviews director credit scores to assess creditworthiness and track record;
· Analyses historical performance and business history, comparing ATO, accounting data, banking data and other third-party sources; and
· Rigorously assesses available security to offer appropriate protections to lenders.
Case study
A busy cafe needs to borrow $40,000 to upgrade kitchen equipment and increase seating capacity as their customer base is outstripping their capacity. The cafe chooses a marketplace lender because they need the funds quickly.
Once approved, investors can fund a portion of the loan through the marketplace platform. Depending on how the platform is set up, investors will see returns weekly or monthly for the duration of the loan term.
It has never been more difficult for businesses to access funds without marketable property securities – not to mention the complicated application processes.
At Bigstone, we have set about removing the red tape and improving the borrower experience. Our process is simple, fast and stress-free with all loans secured by a minimum of:
· The assets being borrowed against;
· Director(s) guarantee; and
· For larger loans, a General Security Agreement.
Robert Spano is executive chairman at Bigstone.
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