Graydon advises on Bank lending vs. Peer to Peer

By Craig Evans, Head of Business Development at Graydon
One of the biggest frustrations associated with bank borrowing is the time it takes them to reach a decision whether to accept or decline a loan request. Peer to peer lenders, on the other hand, are noted for their decision-making speed. It’s little wonder then that small and medium sized organisations are deserting the banks in droves and heading for the greener peer to peer pastures. These are essentially organisations that act as matchmakers between lenders and borrowers.

In the London area, bank lending to SMEs dropped 40 percent in the third quarter of 2015 compared to the same quarter in 2014, when the figure was £1.7bn. The BBA argues that, across all regions, the balances held in current and deposit accounts increased by eight percent, but this accounts for only part of the bank lending decline. A significant proportion of the remaining business is going to peer to peer lenders.

Small and medium sized companies are generally light on their feet compared with their corporate cousins. They make decisions quickly and expect others to do the same. And what better than a sophisticated and almost entirely automated lending system?

The peer to peer lenders aren’t daft; in fact they’re probably more conservative than the banks. They might be quick but that doesn’t mean they skip the basics. They want to be reasonably sure of their clients’ ability to pay. In order to achieve this, they hook up to information providers, who (through their APIs) essentially become part of the peer to peer matchmaking process, furnishing finance details on millions of organisations around the world. The matchmaker’s own algorithms sift the information in order to assess risk automatically.

The banks are not only slowed by their manual interventions and, it has to be said, the fact they are lending their own money, they are also cramped by the legacy of the credit crunch, regulations and compliance checking. Some of this is coming the peer-to-peers’ way but they have a head-start by being technology-centric from the off. They automatically collect and store all the information that goes into a loan decision. The checks and balances information is right there. They are, however, concerned that the regulators might demand too much of them and endanger their inherent advantage – speed. Needless to say, much lobbying is taking place. They are a different business to banks, and the regulators will, no doubt, acknowledge this in their decision making.

When it comes to your own decisions, you may follow the advice given to today’s consumers – spread your borrowing, move it around and don’t put all your eggs in one basket. The downside of which is that a bank, for example, might be servicing your mortgage, your overdraft and your access to capital finance. This will make them increasingly cautious about further lending. On the other hand, if you go to the bank for your mortgage, a P2P funder for your working capital finance and another type of alternative finance company for lease and asset management funding, then each one of these will not feel so exposed overall. This would be good for you too, because you could go back to each one and they’d be more favourable to lending you more.

A peer to peer lender goes into a transaction with its eyes open. It offers you a speedy ‘accept’ or ‘decline’ decision and on terms that are very popular, especially with dynamic and growing SMEs. So, don’t look at peer-to-peer lenders as an easier way to get a loan. They will check you out. If they’re using good information providers, they will know your company background, your credit scores and credit limits, your risk category and your official company data. Depending on the type of organisation you are, they will also have ownership and financial information on the one hand, or company sizing data on the other. You can be sure that if a loan is granted, the peer to peer funder is pretty happy with you. Or, at least, its computer system is.