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MarketInvoice: Institutions Favoured Over Individual Lenders
MarketInvoice is a P2P lending service that allows lenders to lend to medium- and large-sized businesses.
These business borrowers put up specific invoices as collateral, and they repay lenders within a matter of weeks or months when the business receives payment of its invoices from its customers.
Lenders earn high interest rates of around 12%.
I talked with Paul Crayston from MarketInvoice this week, and he had some interesting thoughts on MarketInvoice specifically and P2P lending in general.
While MarketInvoice is for high-net worth individuals and institutions only, some of our discussion is insightful to all of us who do P2P lending:
The romantic notion of peer-to-peer lending
It's inevitable that financial institutions will lend more and more through P2P lending websites. In my opinion, lending by banks, hedge funds and others will overtake lending from individuals like you and me in the near future.
Paul's thinking appears to be on the same lines as mine. While he accepted it is a great marketing angle for some P2P lending websites, he still called it something of a “romantic notion” that individual lenders are treated equally to institutions.
It is cheaper and easier for P2P lending websites to get one big institution to invest a lot of money than to drag in lots of individual lenders.
MarketInvoice knows this from experience. It services all its borrowers' requirements through funds from just 130 high-net worth and institutional lenders.
By itself this doesn't put an end to P2P lending for individuals like you and me. But:
Institutions are being favoured over individuals lenders
Individual lenders have generally been treated equally – or even ahead of – institutional lenders (as Jane wrote in Zopa Lenders Beat Interest Rate Targets).
I recently told Judith Evans for the Financial Times that, try as I might, I haven't been able to find solid evidence that banks or other institutions are being favoured by peer-to-peer lending websites over individual lenders like us.
For the first time, through Paul, I have picked up a strong hint that institutions are benefiting from their greater clout – although luckily it looks like it might just be a temporary imbalance.
Paul said that institutions require much more detailed levels of information about loans than individuals do and, just because they ask for it, they're getting this information.
This means that individual lenders have less information and are therefore more likely to be left with lower-quality loans to play with.
However, Paul seems to think the industry could work towards wider transparency to narrow or even eliminate that gap.
Indeed, 4thWay® is already in discussions with several P2P lending websites to receive precisely the same level of detail that the institutions get, if not more, and so we'll make that available to you as and when it comes in, along with analysis from 4thWay's risk modelling professionals.
MarketInvoice to get more borrowers in – or to lower rates
Paul said that MarketInvoice currently has a queue of lenders going out the door and so it's focus has been to get more borrowers to meet the demand.
However, he suggested that the fact there is a huge number of lenders looking to get in means that perhaps interest rates are too high, especially now that MarketInvoice has established a great track record.
So the P2P lending service could allow more lenders in to compete with each other more to lend their money out. This will force interest rates down.
Quick lending cycle aids learning and reduces risk
MarketInvoice has something like 6,000 loans that have gone right through their lives from start to finish, due to the short-term nature of the loans.
That's something in the region of £400 million-worth of loans.
Paul said that he could think of no other P2P lending website in the world that might have brought so many loans right to the end – and nor can I.
This quick cycle is very useful for MarketInvoice, since it enables it to learn more about its borrowers from start to finish, and much faster than other P2P lending websites.
The faster MarketInvoice learns, the more quickly it can improve its borrower selection and pricing.
Paul also suggested that MarketInvoice and those lending through it will be first to know if the economy turns downwards, since these short-term loans will be the first to suffer from late payments. Many lenders could potentially take rapid evasive action, reducing their losses and keeping their overall return highly positive.
MarketInvoice – the overdraft for big business
Paul said that MarketInvoice has evolved into a revolving credit facility – like an overdraft – as opposed to providing one-off loans to businesses.
On average, businesses are borrowing through MarketInvoice around seven times per year.
Paul was quick to add that its borrowers are not doing so because they're in trouble. In almost all cases the borrowers are growing businesses that are hiring more people. Indeed, invoice trading is driving more new employment than other finance, he said, and that 3/10 of the fastest growing larger companies use invoice finance.
The reason that MarketInvoice's borrowers are repeatedly borrowing is to fund individual projects; for example, they might get a deal with Tesco that requires some investment or extra staff to carry off, and then they'll need it again when they get a deal with the BBC.