Peer to Peer Issues, an excellent article in the Winter R3* magazine suggests there are many lessons to be learnt by investors and Regulators.
*R3 is the Association of Business Recovery Professionals and Bell & Company are members.
We at Bell & Company are seeing more and more enquiries from SMEs struggling with the weight of various forms of debt, especially those with peer to peer debt in their business’ financial model, or whose businesses are reliant on this form of relatively short-term debt to survive.
In this brief blog we will consider:
- The short history of peer to peer so far,
- The peer to peer model and its issues,
- Personal Guarantees and their recovery,
- Bell & Company.
1.PEER TO PEER SO FAR
The emergence of disruptive finance after the crash of 2008-9 in the form of peer to peer lenders was and is absolutely vital to the economy especially SME’s.
After the crash the mainstream Banks not only ceased to lend, they sought to call in loans wherever they could to consolidate their Balance Sheets as much as possible.
The 2008 fallout was and still is massive but peer to peer lenders helped minimise this desperate situation. The low-cost base and high-tech approach was and is a breath of fresh air to businesses seeking much needed finance in the form of working capital.
Most importantly in peer to peer loan applications – there were no slow nos.
If your management and annual accounts are an exact fit to the peer to peer platforms’ requirements and you personally can stand some financial scrutiny, in terms of Credit rating and your net asset value…then there was a good chance you would be eligible for peer to peer finance.
The market in turn expanded very quickly with many new players entering the market. This has in turn been fuelled by huge marketing efforts and use of the high-tech platforms developed.
The peer to peer lenders and their platforms attracted investors with the offer of returns far in excess of the rates on the High Street and the boom developed.
Hedge funds and alike are now huge players in the peer to peer market and the Government has also provided support.
IMPORTANT: Yes, there are now some issues, but peer to peer is still the go to place for funding as the mainstream Bankers still really only consider SME’s who can offer adequate security first.
2.THE PEER TO PEER MODEL AND ITS ISSUES
As stated above the peer to peer model works on platforms that require uploaded data. This usually takes the form of accounts, management accounts, bank statements and the asset and liability statement of the borrower.
This is processed by the platform as the first stage of the decision process.
Human interaction comes in the form of the underwriter who may ask questions, and these are usually answered and resolved by any broker involved.
Nearly all platforms work on a sales/commission basis. Obviously, the peer to peer lenders are not banks – it is not their money. As this market and loans have matured problems have started start to arise.
This coupled with the late arrival of the FCA, ‘to the party’ has seen any number of problems. The financial Press in the form of the FT, The Times and Sunday Times are continually commenting on the issues the industry faces.
We have seen a number of ‘car crashes’, where money has literally been thrown at clients, almost under the premise of the more loans you have the better credit risk you are.
A genuine example of this is, when we sat with two indebted directors owing in excess of £500,000 and struggling, receiving an unsolicited text, on their smart phone, already approved loan of £35,000. You couldn’t make it up!
3.PERSONAL GUARANTEES AND THEIR RECOVERY
If you borrow as an unincorporated body e.g. sole trader or partnership, then you are obviously exposed to the full amount of the loan plus interest, plus costs, should the loan fail. These costs can be substantial with principal amount of the default loan attracting the full interest charge for the loan + legals +++.
With limited company loans, Personal Guarantees are required by Directors, potentially the spouses/partners of homeowners and possibly non-executive shareholders.
At Bell & Company dealing with claims on Personal Guarantee is a niche area of work that we excel in. Please see the link on a recent blog that we issued on the subject.
In many cases of peer to peer lending some of the due diligence undertaken on the validity of the asset and liability statements is poor. The desire to ‘fire out’ the money and earn the fees saw many cases of poor practice.
With the involvement now of the FCA, processes are rightly tightening up, but we know there are a legacy of issues with peer to peer loans and their associated Personal Guarantees.
4.BELL & COMPANY
We have recently settled a peer to peer loan on the back of a Personal Guarantee totalling £84,000 at £27,000. In this instance, we impeded the lenders attempt to commence legal action.
Peer to peer lenders are all too keen to give carriage of cases to solicitors with no consideration to the amount that will actually recover.
Again, this we believe stems from the over reliance on data and information. At which point the lack of quality of due diligence often becomes apparent.
Bell & Company continue to strive to work with peer to peer lenders, but solely for our clients, to ensure they maximise their recovery for their stakeholders in cases that fail…but they don’t believe it! They are usually very aggressive at the start of any case. Our role is to explain the TRUE position they now find themselves in.
As we always say in a failed finance position – The clients should not have borrowed but then the lenders should not have lent – so this is a two-way street.
If you know of anyone under this sort of duress, do them a favour and call us or send on this blog. To see real results, check out our success cases: https://www.bellcomp.co.uk/success-stories/