The Good News Story Behind P2P Lending
By Jim Kharouf
It’s easy to get caught up in the numbers – how much a company or investment is making or losing. But what is often left out is the impact it may have on individuals and the broader economy. Prime Meridian Investments has invested in the individual, home, auto and small business peer-to-peer lending sector for years on behalf of our clients. But what is frequently overlooked in the small business lending category is the effect they have in helping enterprises start and grow. A new study from Oxford Economics illustrates the impact one peer-to-peer lender has had via small business loans in the UK, US, Germany and the Netherlands.
The report, which tracked lending by Funding Circle, showed that from 2007 through 2017, Funding Circle provided £3.9 billion in gross value-added contributions to the GDP of those four countries, which means for every £1 million ($1.32 million) of loans issued via Funding Circle, it helped add £2 million ($2.64 million) to a country’s GDP. What’s more, the report said the loans enabled an estimated 75,000 jobs at the end of 2017, with some 41,500 individuals finding direct employment from those small businesses that took out loans via Funding Circle.
This is valuable research of a crucial component of any economy – small to medium sized enterprises. According the OECD, SMEs account for about 99 percent of all firms globally and provide 70 percent of the jobs. In the US, for example, there were 29.6 million small businesses which accounted for 99.7 percent of US companies in 2016 and 57.9 million employees just under half of the US workforce, according to the US Small Business Administration. Small businesses in the US also account for 46 percent of the private, non-farm GDP in 2008, the most recent figure available from the SBA.
Funding Circle made its first US loan in October 2013 after starting its business in the UK in August 2010. In just over four years in the US, the company’s platform had $633 million in loans under management. By comparison, the firm in the UK held £1.1 billion ($1.45 billion) new loans under management in 2017, and £598 million in net lending.
The growth of these loan portfolios is the result of a simple shift in global financial practices. Banks simply curtailed or stopped lending to small businesses in the aftermath of the global financial crisis of 2008. This opened the door for Funding Circle and many other peer-to-peer lending firms to fill that gap. The Oxford Economics report says Funding Circle did just that. For all UK banks the net lending amount for small businesses in 2017 was £677 million ($895 million), while Funding Circle’s net lending was £598 million ($790 million). The report pointed out that the British Business Bank’s 2016-2017 study showed that loan rejections rates were high for young businesses and for those wanting to scale up. This was at a time when the number of SMEs in the UK grew by 28 percent from 2011 to 2017.
What happened in terms of lending trends is predictable. Use of peer-to-peer lending platforms rose from just 1 percent to 5 percent in the UK, while the numbers seeking a bank loan fell from 48 percent to 39 percent. And peer-to-peer lending platforms totaled £737 million ($974 million) in the final quarter of 2017, up 25 percent over the same quarter a year prior, and up 75 percent from 2015.
Of those surveyed, the impact on their businesses was substantial with 67 percent saying without funding there would have been an impact on profits or investment with another 26 percent saying it would have affected jobs and 26 saying they would have missed an opportunity. For 22 percent, it would have meant the business would have failed.
P2P In The USA
In the US, the lending picture is quite similar. Small business loans in the US rose 68 percent from 2010 to 2017, but small business loans of less than $1 million, rose just 11 percent over the same period, according to the US Small Business Association. And of those small business loans, categorized as commercial and industrial, they actually fell to 20 percent from 30 percent. And the smallest loan category of $100,000 or less, fell to 9 percent from 13 percent in 2017.
Meanwhile the report showed that Funding Circle showed an 80 percent increase in new loans in 2017 to $509 million, up from $281 million the prior year. A Funding Circle survey showed that 50 percent of their customers first approached a bank and were rejected. Another 36 percent said the process took too long, a similar refrain from UK small business borrowers.
And what was the impact of those loans? The survey showed that 27 percent of those borrowers said they would have missed an opportunity without it, 22 percent said they would not have been able to consolidate debt and 16 percent would not have seen a growth in profits. Just 13 percent said there would have been weaker profit growth and no investment made. Just 3 percent said it would have affected jobs.
And by Oxford Economics’ estimates those Funding Circle loans provided a total gross value added to the US GDP of $13 billion per year and added 14,800 jobs. They also contributed $310 million in annual tax revenues. Indirect impact of these loans is even greater.
The study also covered Germany and the Netherlands, two other markets that are served by Funding Circle.
Ultimately, the report paints an interesting picture of how peer-to-peer lending is changing the lending landscape and contributing serious economic and job growth in their respective markets. This is the goal for peer-to-peer lending platforms. Yes, they want to profit, but in today’s financial space, technological and financial innovation is giving businesses more outlets to choose from and truly changing lives. Let’s remember that too.