Alternative is the new mainstream
Yann Murciano is chief executive officer at London-based peer-to-peer property lending company Blend Network.
Having emerged just over 10 years ago in the aftermath of the global financial crisis, alternative finance has come a long way, and is playing an increasingly central role in the mainstream financial ecosystem.
A conversation about alternative finance and peer-to-peer (P2P) lending just 10 years ago would have raised eyebrows.
At best, alternative lenders would have been considered loan sharks, and at worst, they would have been reported to the Financial Conduct Authority (FCA).
Fast forward a decade, and peer-to-peer and crowdfunding has not only become tightly regulated by the FCA, but has also turned widely popular among property developers attracted by the flexibility and ease of borrowing for their projects through alternative finance platforms.
Last year, a ThinCats survey of more than 500 medium-sized UK businesses about their experiences when seeking external funding revealed a shift towards alternative finance for younger businesses.
The survey showed that for businesses less than 10 years old, only around a third approached their bank first when seeking funding compared to almost two-thirds for businesses established between 10 and 20 years ago.
It also showed that younger businesses were much more likely to pick an alternative finance platform as their first-choice lender.
At Blend Network, we see a similar appetite from young, dynamic SME property developers for alternative finance – our team reviews in excess of £100 million loan requests per month.
The conversations with borrowers shed some light on the likely reasons for young businesses’ preference for alternative finance. In particular, three reasons are worth mentioning.
First, alternative finance platforms such as peer-to-peer lenders are able to offer a higher degree of flexibility and one-on-one customer relationships compared to traditional lenders.
The reason is very simple. Alternative lenders are young, dynamic organisations filled with entrepreneur-minded doers and go-getters who, in many aspects, are trying to do the same thing as their borrowers are: build a sound business.
For example, at Blend Network, while operating within the FCA’s highly regulated framework and using some of the best Legal500 lawyers and award-winning quantity surveyors, our lending managers compliantly communicate with our borrowers over recorded online communication tools to ‘get things done’.
Second, alternative lenders offer a more flexible and less automated approach to traditional due diligence processes.
This is because while the industry is highly regulated by the FCA, often small and agile organisations can make or break a deal.
These firms are happy to think outside the box as long as the deal makes sense.
At Blend Network, a number of our lending managers are former or current property developers and investors.
This means that instead of approaching the due diligence process from a ‘spreadsheet’ mindset, they approach the due diligence process from a property developer’s mindset.
Not only are they able to understand, assess and price the risk accordingly, they are also often able to offer advice and suggestions to borrowers.
In other words, lending managers are able to speak the property developer’s language.
Third, due to their nimbler size and the lack of heavy legacy processes, alternative lenders are able to offer a smoother, faster and more tailored customer service.
While traditional lenders are often slowed down by complex practices and multiple management layers, alternative lenders are able to offer faster decision-making due to shorter and more effective reporting lines.
For example, at Blend Network there is no separation between origination and underwriting team. All lending managers in the origination and underwriting team are decision-makers.
Such efficiencies are key, especially in the property development sector where time is often money and any delay in decision-making may translate in lost deals, extra costs, or both.
In summary, I believe a crisis doesn’t create new trends, but it does have the tendency to accelerate trends that are already in place, and perhaps move them along faster.
To me, there is no question that following the current crisis we will see more alternative finance, including peer-to-peer lending as borrowers gain more trust and confidence in the sector and remember those lenders who stuck by them when things were tough.