This month’s Debt Connection looks at peer-to-peer lending and crowdfunding, and the relevance to mid-market corporates.
There has been a lot of noise in the media about peer-to-peer lending and crowdfunding, so it seems worthwhile explaining what this means and if it is relevant for mid-market corporate businesses.
Crowdfunding is aimed at start-ups and early-stage businesses. You “pitch” your idea or business to potential investors and, if interested, they will contribute a sum to the proposed venture. Then you decide how you want to reward those investors, potentially with a unique perk, a gift, or first delivery of the product. This is known as reward-based crowdfunding. Alternatively, there is investment crowdfunding – where instead of giving a reward, you give investors equity in your business. If you decide on the investment route and release equity, there are quite a few legals that you’ll need to deal with and you’ll also need to ensure that you keep your shareholders updated on trading and strategy.
Peer-to-peer lending is a way of getting a cash injection into an established business. The essential difference between this and investment crowdfunding is that you do not give away any equity but rather pay interest on the money you borrow. The loan could be used for new machinery, purchasing a property, buying stock and working capital, as examples.
Investors on peer-to-peer and crowdfunding platforms come in a variety of guises, with the majority being individual private investors but also include professional investors, local government authorities, education bodies and also the Government-backed British Business Bank.
According to a report produced by the innovation charity Nesta and the University of Cambridge in November 2014, the average amount raised from peer-to-peer business lending was €102,388 and from equity crowdfunding was €278,400. Across the various platforms, the largest amount that can be raised is between €1.4m and €4.2m with repayment terms of up to 5 years. It is worth noting that depending on the size of the loan, security in some form will be required. This could either be a personal guarantee or security over a particular asset or assets in the business.
Crowdfunding and peer-to-peer finance is providing an innovative, decentralised and disruptive source of funding to SMEs. As the crowdfunding and peer-to-peer market currently stands, these methods are generally not relevant to mid-market corporates due to the limited size of funding that can be sourced and its somewhat unstructured nature. With more professional investors starting to invest through these increasingly sophisticated platforms, they are likely to become more relevant in the future.
For now, there are a number of non-bank lending options available to mid-market corporates including direct lending teams within insurance pension companies, debt funds and bond markets. These non-bank lenders can typically offer longer funding with higher leverage levels, no amortisation, often fewer covenants and higher covenant headroom than a bank, and should be considered as part of a finance raising exercise.