Tuesday November 22, 2016 Daily News Digest

sme overdrafts uk

News Comments Today’s main news: Prodigy Finance funding foreign MBA students at U.S. colleges. Today’s main analysis : UK banks shift overdraft lending toward big businesses. Today’s thought-provoking articles: FinTech ideas banks are stealing. Credit rating agency questions rise of lending algorithms. Ways to mitigate P2P lending risk. United States Foreign MBA students get college loans through Prodigy […]

sme overdrafts uk

News Comments

United States

United Kingdom

European Union

Australia

China

India

Asia

International

News Summary

United States

Prodigy Finance Is Putting International Applicants Into Top-Ranked MBA Programs In The US (BusinessBecause), Rated: AAA

After several years working for Deloitte, Abhirath started looking at funding options to study an MBA abroad. But most local banks were unwilling to lend internationally and offered only high-interest loans, riddled with clauses and extra costs.

Instead, Abhirath applied for an international post-graduate loan from community lender, Prodigy Finance.

Prodigy Finance’s borderless, peer-to-peer lending model gives international students access to the loans they need to study abroad.

In September, Abhirath, along with Vyom Vats, was chosen for Prodigy Finance’s inaugural scholarship program. They both received $20,000 in additional funding.

Crowdsourced-Debt Financing is Growing (ValueWalk), Rated: A

The consumer online lending market is experiencing difficulty, with increasing delinquency and default. When questions were raised regarding the lack of due diligence in online loans, they were initially dismissed. What could go wrong? Now two years later the answer is clear as defaults are leading to business closures. Business lending for asset-based revolving lines of credit, however, has taken a different path.

Part of causation for the defaults is due to the race to grow, a trend that has reversed recently. Avant cut its monthly lending target in half while Circlebank Lending stopped making new loans entirely, Bloomberg reported. Shakeups have occurred in the C-Suite.  LendingClub CEO Renaud Laplanche resigned in May amid questions regarding faltering loans and Prosper Marketplace CEO Aaron Vermut recently resigned as it cut 25% of its staff, reported a $35 million second quarter loss and closed its secondary market for loans.

Krista Morgan, CEO of P2Binvestor, an online platform providing business lending for emerging companies businesses seeking revolving lines of credit, has taken a different approach.

The two-year-old company, which just received $7.7 million in a second round of angel financing, conducts due diligence on each loan and has skin in the game, investing alongside other investors.

The online lender currently works only with a small group of accredited investors connected to the firm, but plans to expand to offer the investment to a wider range of accredited investors shortly.  Investors can gain exposure to a large $10 million line of credit by only accepting as little as $1,000 of the risk exposure.

Crowd Valley at Cornell’s Fintech Hackathon in New York City (GrowVC Group), Rated: A

From Friday the 11th to 13th of November, Crowd Valley (a Grow VC Group company) joined professionals from EY, Capital One, Addepar and CoVenture as well as students from institutions such as Cornell, NYU Stern and Columbia for Cornell’s annual Fintech Hackathon held at their Cornell Tech location in New York City. The focus of the event was to promote the innovation of applications and technology for two verticals: Financial Inclusion and Anti Money Laundering (AML).

OnDeck To Present At The J.P. Morgan 2016 Fintech & Specialty Finance Forum (PR Newswire), Rated: B

OnDeck® (NYSE: ONDK), the leader in online lending for small business, announced today that Noah Breslow, Chief Executive Officer, and Howard Katzenberg, Chief Financial Officer, are scheduled to present at the J.P. Morgan 2016 Fintech & Specialty Finance Forum in New York on November 30, 2016 beginning at 12:30 p.m. E.T.

United Kingdom

Conrad Ford argues that UK SMEs are still under pressure as banks shift overdraft lending in favour of large businesses (Asset Finance International), Rated: AAA

SMEs remain under pressure as banks continue to shift overdraft lending away from them in favour of large businesses.

There has been a 37% fall in the value of overdrafts provided to SMEs over the last five years from £19 billion to £12 billion* (see graph), whilst overdrafts given to large businesses have increased by 25% over the same period from £19 billion to £24 billion.

SMEs, especially those within the retail and leisure sectors, can find the lead up to Christmas very challenging if they do not have access to overdrafts. This is because firms increase spending in order to stock up ahead of the crucial Christmas trading period but customers often delay invoice payments until the New Year.

Furthermore, salaries tend to be brought forward so staff can be paid before Christmas and overdrafts are often used to cover this cost.

SMEs face growing pressure and difficult choices as the value of overdrafts available to them continues to fall.

AU10TIX Announces Partnership With Startupbootcamp Fintech Accelerator Program (Crowdfund Insider), Rated: B

AU10TIX, a fully owned subsidiary of ICTS International N.V, announced on Monday it has formed a new partnership with the Startupbootcamp Fintech Accelerator Program as a way to help support fintech startups.

European Union

Weekly industry news roundup – November 21, 2016 (Bondora), Rated: AAA

The Hindu Business Line reported on data released from the Peer-to-Peer Finance Association which shared data indicating that worldwide P2P lending has grown from £2.2 million in 2012 to £4.4 billion in 2015.

For our German readership, Huffington Post released an article which details how P2P platform are the best alternatives for investors looking for higher investment returns and borrowers looking for cheaper credit options than current banking system offers them.

Sweden’s Klarna buys talent from troubled German fintech startup Cookies (Tech.eu), Rated: A

Swedish payment service provider Klarna has agreed to take on the team behind the insolvent Berlin fintech startup Cookies.

While the terms of the acquisition by Klarna were not disclosed, Swedish media reports that the sum is likely low and that it was essentially an “acquihire.”

Australia

Credit rating agency questions the rise of lending algorithms (Australian Financial Review), Rated: AAA

The increased use of algorithms to write consumer loans has been met with scepticism by rating agency experts who doubt the ability of computers to fully assess credit risk.

Speaking at the Australian Securitisation Forum, Moody’s US-based managing director Jim Ahern told the audience algorithms “work until they don’t” when it comes to approving loans.

Algorithms, he said, are only informed by past and recent data and may be unhelpful if there are meaningful changes in the environment.

We need plans for when robots are in driver’s seat (Australian Financial Review), Rated: A

Financial services companies, including technology-oriented fintech start-ups, are emerging to challenge the roles of banks and the large financial institutions. Fintechs are rapidly transforming and disrupting the marketplace by providing digital or “robo-advice” using highly sophisticated algorithms operating on mobile and web-based environments.

However, the rapid pace of ICT development — with A.T. Kearney predicting robo-advisers in the US will manage investment assets worth $2 trillion by 2020 — makes it critical that we plan for a world where technology is in the driver’s seat.

The ASIC position does not go as far as the one adopted by the EU, which provides an explicit “right to explain” and “right to challenge” on decisions made by algorithms. Nor does the ASIC guidance place an explicit onus on the algorithmic provider to explain, in simple terms, the logic behind an algorithmic decision. This might be intentional since algorithms may involve highly complex code and technical considerations well beyond the skill set expected from an average financial services adviser.

China

Mainland Chinese banks lag global rivals in digital investment, says McKinsey (South China Morning Post), Rated: AAA

Mainland Chinese banks are lagging far behind their global rivals in investing in the digital technology needed to compete in a challenging industry landscape with evolving client demand and fierce competition from fintech companies, an industry report said on Monday.

Many mainland banks devote less than 1 to 3 per cent of their income to technology and digitalisation, while leading global banks on average invested 17 to 20 per cent of pre-tax income to embrace the digital era, McKinsey & Company said in a banking report.

Han Feng, an associate partner at McKinsey, said the digital era for China’s banking industry has arrived.

India

P2P lending: the real benefits and ways to mitigate risk (YourStory), Rated: A

A few critical steps, if followed diligently by the P2P platform, can help minimise this risk for lenders. Traditional data like bank statements, salary slips, ITR etc. supported by digital data, online transaction data, and mobile and social data should be carefully evaluated and studied to understand the borrower’s ability, stability, and intention to repay the loan taken.

The CIBIL of the borrower is a must for the platform to be able to evaluate past performance. The identity verification process (physical or through technology) has to be done to eliminate fraudulent applications.

P2P lending platforms should allow lenders to diversify across many loans by factionalising an individual borrower. Diversification is a crucial step lenders must take to mitigate risk. As a lender, you need to check if the platform gives you a diversity of borrowers for investment. It’s always better to spread your  investment across a minimum of 100 loans of different types and risk grades viz. city, risk/returns, loan purpose, gender, caste/community, tenure, loan amount, etc.

Check how strong the risk team is. Who runs the risk department? If required, please speak/write to the CRO. Ideally, the risk team should be of people with a strong track record in risk management and practice. The data science team within the organisation should be responsible and producing analytical work to improve the quality of the decision-making. In India today, not many P2P lending players publish data and statistics about loan purpose, returns, and default ratio on their website. However, serious, long-term players will, because they realise that it’s critical to do so to bring transparency in the system and build lender confidence.

The agreement between the lender and the borrower is “I owe you”  and one can rest assured that the lender has the right to collect what is due to him at any point in the future when say, the country is out of recession or overcomes the impact of a natural disaster. The P2P platform should keep in touch with the borrower and get regular updates on his/her status. Having said that, India’s story looks very positive for the next 10 years.

Asia

Fintech ideas that banks are already stealing (The Middle Ground), Rated: AAA

On the one hand, some forms of Fintech – such as credit card comparison sites and home loan comparison sites – are mostly on the side of the banks. They make most of their money by directing the customers to the banks (more on this below). The banks, of course, tolerate them because they bring in customers.

On the other hand, some forms of Fintech threaten to replace entire segments of the banking business. The P2P lending websites, such as Capital Match and MoolahSense, could well replace banks in the area of small business loans. Most notably, Fintech companies such as Nutmeg have begun to pose a serious threat to the notion of private banking, by replacing the traditional relationship officer or private banker with online wealth management.

Recent developments though, suggest that big banks are taking a third alternative.

And now, Goldman Sachs has become the first bank to launch a P2P lending service. While Fintech lovers often claim that banks lack the innovation and flexibility to match Fintech counterparts, they seem to be forgetting that money is a sort of superpower. The cost of setting up a P2P lending website is peanuts to a bank, and they even have the sheer capital to guarantee loans that go bad.

If a bank launches a P2P site that’s also backed with its own guarantees, it will draw customers from smaller Fintech companies. And unlike those smaller companies, the bank can afford to fail repeatedly.

HSBC is already testing a transaction platform that uses blockchain technology. One of the underlying drivers of cryptocurrencies such as Bitcoin, blockchain is (among other things) a method of verifying transactions.

With blockchain technology, multiple unrelated sources witness the transaction; and it’s not possible for any one party to fabricate it. Think of it as handing money to someone in a dark alley, versus handing money to someone in a well-lit area with 200 witnesses. The latter is fairer and safer.

Fintech sites are filling in many of the problems with traditional banking, but they might be a little overconfident regarding their edge. They might do well to remember second-mover advantage, and that what they’ve build over a decade the banks can pay enough to imitate within the year.

Fintech companies need to pursue that one great quality that banks can’t buy and copy – customer service, and a good relationship with their users. Because if there’s one thing banks – or anyone – can ever own, it’s good service.

Here are the Ten Fintech Firms that Singapore Just Gave S$ 1.15 Million (Crowdfund Insider), Rated: A

As part of the first annual Fintech Festival, Singapore gifted S$1.15 million to ten different Fintech firms.

The 10 awardees are:

Award         Company Name Prize
ABS Global FinTech Award1 BioCatch S$150,000
MAS FinTech Awards (Singapore Open)2 1st place – fastacash Pte Ltd S$250,000
2nd place – M-DAQ Pte Ltd S$100,000
3rd place – Pole Star Space Applications Ltd S$50,000
MAS FinTech Awards (Singapore SME)3 1st place – Tookitaki S$150,000
2nd place – Turnkey Lender Pte Ltd S$100,000
3rd place – Funding Societies Pte Ltd S$50,000
MAS FinTech Awards (Singapore Founder)4 1st place – CashRun S$150,000
2nd place – Aimazing S$100,000
3rd place – FinChat Technology S$50,000
International

Capgemini launches global fintech initiative (Econotimes), Rated: A

Capgemini, a global leader in consulting, technology and outsourcing, announced that it is launching its global fintech initiative in order to fast-track fintech engagements with its global financial services clients.

The fintech initiative by Capgemini, is aimed to extend beyond the traditional incubator concept to encompass connection, curation, incubation, and investment stages. The initiative will elevate the company as an active participant in the process of validating and evolving the core value propositions of participating companies in collaboration with clients. It will also address challenges in integrating external innovation by bridging gaps in adoption including tech integration, data management, process changes, among others.

Authors:

George Popescu
Allen Taylor

Overdraft vs invoice finance

Overdraft vs invoice finance

The overdraft has long been a staple of business life for many UK small- and medium-enterprises (SMEs); a valuable source of working capital to support cash flow needs, especially when dealing with late payments. But as banks scale-back their overdraft offerings, companies are struggling to access finance. Steven Renwick, CEO of Satago, discusses how the […]

Overdraft vs invoice finance

The overdraft has long been a staple of business life for many UK small- and medium-enterprises (SMEs); a valuable source of working capital to support cash flow needs, especially when dealing with late payments.

But as banks scale-back their overdraft offerings, companies are struggling to access finance. Steven Renwick, CEO of Satago, discusses how the rise of alternative finance means this need not sound the death knell for SMEs.

An extension of credit, overdrafts are flexible facilities that can be drawn upon as and when needed to assist businesses with cash flow requirements. The overdraft has existed in the UK for nearly 300 years[1] and has been a stalwart financing option for businesses old and new.

For many SMEs, however, the option is no longer on the table. Capital controls imposed following the 2008 financial crisis have meant that banks have been systematically decreasing their overdrafts in order to clean up their balance sheets – and, with banks prioritising business with multinational corporates, it is SME overdrafts that are the prime targets for the cull.

There are 5.4 million SMEs in the UK[2], making up 99% of all the country’s businesses[3] and playing a key role in the health of the economy. Certainly, the sector is one that should be sustained and encouraged to grow. Yet figures have shown that lending to small businesses via overdrafts is dropping by as much as £100 million each month. And the total value of such facilities has fallen by a massive 42% in the last five years – from £20.9 billion in April 2011 to £12.1 billion in March 2016[4].

This is having a devastating impact on many SMEs, restricting working capital for hundreds of thousands of businesses that have relied on overdrafts to provide short term cash flow support. Indeed, traditionally overdrafts have been viewed as a particularly useful means

for addressing the issue of late payments – a perennial problem affecting SMEs. It has been estimated that half of all invoices owed to small companies in the UK are overdue, averaging nearly £21,000[1], meaning that many must juggle funding gaps. Yet, a recent survey of business owners revealed that 30% saw reductions imposed on their overdrafts between 2013 and 2015, while approximately 17% reported having their overdrafts completely removed[2].

 The next generation of finance

Yet there is little to suggest that a comeback from the once-common overdraft is on the cards, presenting significant challenges to SMEs, who must seek other means of addressing cash flow needs triggered by late payments.

In this respect, alternative finance is stepping up to the plate, presenting new avenues of technology-based funding that are affordable and, importantly, readily accessible alternatives to the overdraft. As a result, the financing landscape is shifting dramatically for UK SMEs, with companies unable to access capital from the banks instead utilising £76 billion from alternative financiers, (according to Funding Options). Alternative lending to SMEs now equates to 46% of the value of that of traditional term loans and overdrafts[3].

Invoice finance has emerged as a valid alternative – and even a preference – to the overdraft. In particular, selective invoice finance is an effective, valuable method of addressing late payments. This type of flexible funding facilitates immediate access to cash tied up in individual unpaid invoices (as opposed to the approach of financing the entire sales ledger used in more “traditional” invoice financing, which may not be a cost effective solution). Certainly, this new approach ticks a lot of boxes for SMEs as invoice finance is specifically designed for debtor books, which allows small businesses to free up working capital and facilitate improved cash management capabilities.

What’s more, some alternative financiers are leveraging cutting-edge, real-time technology capabilities to gain a greater understanding of companies seeking finance (compared with many bank assessments of SME overdraft applications, for example), which in turn is enabling them to undertake effective, superior risk analysis. With such insights, providers can be better-positioned to finance certain companies, and are therefore more likely to be able to meet the needs of those denied finance elsewhere.

A step further

Alongside specific finance solutions, innovative companies are also using technology to help SMEs improve their financial health via enhanced credit control functionality. By automating the debtor management process – with solutions that provide continued tracking of invoices, with automatic, customisable reminders sent to customers – users can not only manage their invoices more effectively, business efficiency and productivity can be improved. Indeed, by optimising credit their control strategies, it can even be possible for SMEs to reduce their late payment volumes to such an extent that external finance support is no longer required.

With overdrafts on the endangered list, it is important that SMEs that require cash flow support have a suitable strategy in place to address the issue of late payments. A new era of finance is emerging, and alternative financiers are positioned to equip the underserved SME sector with the tools they need to flourish.

[1]

[2] www.parliament.uk/briefing-papers/sn06152.pdf

[3] www.parliament.uk/briefing-papers/sn06152.pdf

[4]

[5]

[6]

[7]

Satago is an all-in-one online finance and cash-flow platform offering finance and receivables management to microbusinesses and small- and medium-sized enterprises (SMEs). The fintech firm serves a large but under-served business segment in the UK, overcoming the issue of late payments by converting outstanding invoices into cash, and using innovative technology to give small businesses the same level of credit control as their larger counterparts. (www.satago.com)

 

Overdraft vs term loan

Overdraft vs term loan

Growth Street offers an overdraft alternative, like a line of credit available in the US, facility where one can draw and repay whenever they want. Such a facility allows for higher customer life time value and therefore can accommodate higher cost of customer acquisition. However managing lending capital cost and availability and the ongoing customer […]

Overdraft vs term loan

Growth Street offers an overdraft alternative, like a line of credit available in the US, facility where one can draw and repay whenever they want. Such a facility allows for higher customer life time value and therefore can accommodate higher cost of customer acquisition. However managing lending capital cost and availability and the ongoing customer underwriting are more challenging.

Unlike in the US, in the UK businesses use overdraft to finance they short-term cash flows. However, overdrafts for small firms are being withdrawn or reduced by the high street banks at an alarming rate, restricting working capital for hundreds of thousands of British businesses.

Banks are reluctant to do overdraft because of the minimum capital requirement regulation by BASEL 3. If more than half of the overdraft is used by a business, it cost banks twice as much because of the additional capital buffer required. Another factor is information used by banks to give loans or overdraft is little outdated, as they use historic business data whereas Growth Street uses information via an integrated API, which is live and precise.

Around 17% of the UK’s small-to-medium-sized enterprises (SME’s) have reported that their overdrafts have been removed altogether and a total of 30% have seen reductions imposed over the past two years, according to a survey of 250 business owners by Bank of England. Data from them showed that £5m-worth of SME overdrafts have been cut every day since 2011, as banks seek to reduce the risk on their balance sheets.

Origin of Growth Capital

Shortage of working capital for small businesses was the driving force behind the genesis of Growth Street. The start-up is headquartered in London and is a business to business marketplace for alternative overdrafts. It was established in 2013 by five like-minded people looking to disrupt the short-term financing market. In their first round of investment, they were able to raise $7.6 million from Art Alliance Ventures and David Giampaolo and another $8 million was raised in last quarter of 2015. Joshua Green, chairman of the group is a successful investor and thus brings in a lot of experience. James Sherwin-Smith is the CEO of the group and describes himself as an engineer by education, consultant by experience and entrepreneur at heart, and has been part of many successful startups like Dsruptiv, d4.

Overdraft vs term loan

The fixed term loan is a popular choice for small businesses, but they have to pay off the loan on a monthly basis which magnifies the problem for a growing business. Growth Street connects the businesses who want to lend with the businesses that want to borrow, they are like an exchange that matches orders. The originator seeks to obtain a continuous stream of information from the businesses both before the loan and after the loan, to make sure the borrowers get the required amount of limit and all the assumptions and calculations are appropriate. This day to day monitoring also helps them identify any future stress in their borrowers.

Growth street uses number of factors to check whether a business qualifies or not, following is the list below:

  1. Current and historic profit before tax.
  2. Current assets and current liabilities.
  3. The stability of the business (which they can establish by reviewing the net assets over time.)

If the borrower is approved, they can borrow from £1,000 to £500,000. Once they become a customer, they will review the status on a regular basis, and may be able to increase the facility limit and decrease the interest rate as the business grows. Growth Street generates their revenues from the interest they charge on the money they lend on behalf of the lenders. There is a monthly fee of 0.4% on the peak amount borrowed and there are no fees for any month in which they don’t borrow. Borrower’s interest rates vary on market conditions and business profile, but usually, they are from 0.2% to 1.25% per month. The representative APR is 11% at an assumed facility utilization rate of 70%.

Lending Capital Sources

Growth Street funds come from the group of high net worth individuals and private corporations, led by Art Alliance. In the near future, once they receive appropriate permissions from Financial Conduct Authority (FCA) they are planning to open up the marketplace for everyone who wants to become a lender. Currently, Growth Street has 25 well-trained employees in technical, sales and marketing, and legal department. They have an in-house risk process and underwriting team that does all the analysis and credit approvals. They have a provision fund which basically protects the lender from any defaults or losses.

Part of the payment goes to this provision funds and is also protected by mezzanine debt. Lenders place the offers on the platform; they have the provision of either place the bid at market rate or whatever specific rate they want. Lenders get full payment at the end of the tenure and they can decide to lend the money again through the marketplace or withdraw.

After assessing the borrower’s profile, borrowers and lenders are matched for 30 days. If the borrower is able to pay before 30 days, a new order is created and is matched with a new lender at a new price, the lender offering the cheapest rate is matched. It is a reverse auction for lenders, each lender will bid an interest rate, and the cheapest rate gets matched first. Typical range borrowers are willing to pay is 8-15%, based on variable risk rate.

The company’s current book stands at “multi-million pounds”, with the target to achieve triple figure million pounds. They are simultaneously also looking for international opportunities.

Research analysis of 160,000, Companies House records showed that UK SME’s, unable to access capital from the banks, are now using £76bn worth of alternative finance. Alternative lending to SME’s is now equivalent to 46% of the value of traditional term loans and overdrafts, which have fallen to £163bn, down 5% from £172bn a year ago, and 17% from £197bn four years ago. If these numbers are anything to go by, Growth Street has a good chance of beating the high street. The Brexit provides another opportunity for the alternative lender to capture the market being exited by continental banks in London.

Author: George Popescu and Heena Dhir

George Popescu

 

 

P2P business line of credit to increase customer lifetime value

P2P business line of credit to increase customer lifetime value

Growth Street is a p2p lender offering an overdraft alternative, like a line of credit available in the US, facility where one can draw and repay whenever they want. Lines-of-credit, unlike term loans, create sticky customers and therefore increases the customer lifetime value. This allows to also justify a higher cost of customer acquisition. The biggest problem businesses encounter […]

P2P business line of credit to increase customer lifetime value

Growth Street is a p2p lender offering an overdraft alternative, like a line of credit available in the US, facility where one can draw and repay whenever they want. Lines-of-credit, unlike term loans, create sticky customers and therefore increases the customer lifetime value. This allows to also justify a higher cost of customer acquisition.

The biggest problem businesses encounter is working capital, a huge opportunity cost incurred as businesses cannot reinvest, as they need a cash reserve to pay rent, salaries, taxes and another day to day expenses. The fixed term loan is a popular choice for small businesses, but they have to pay off the loan on a monthly basis which magnifies the problem for a growing business. Growth Street connects the businesses who want to lend with the businesses that want to borrow, they are like an exchange that matches orders. The originator seeks to obtain a continuous stream of information from the businesses both before the loan and after the loan, to make sure the borrowers get the required amount of limit and all the assumptions and calculations are appropriate. This day to day monitoring also helps them identify any future stress in their borrowers.

Why overdrafts ?

Overdrafts for small firms are being withdrawn or reduced by the high street banks at an alarming rate, restricting working capital for hundreds of thousands of British businesses. Around 17% of the UK’s small-to-medium-sized enterprises (SME’s) have reported that their overdrafts have been removed altogether and a total of 30% have seen reductions imposed over the past two years, according to a survey of 250 business owners by Bank of England. Data from them showed that £5m-worth of SME overdrafts have been cut every day since 2011, as banks seek to reduce the risk on their balance sheets. Shortage of working capital for small businesses was the driving force behind the genesis of Growth Street.

The start-up is headquartered in London and is a business to business marketplace for alternative overdrafts. It was established in 2013 by five like-minded people looking to disrupt the short-term financing market. In their first round of investment, they were able to raise $7.6 million from Art Alliance Ventures and David Giampaolo and another $8 million was raised in last quarter of 2015. Joshua Green, chairman of the group is a successful investor and thus brings in a lot of experience. James Sherwin-Smith is the CEO of the group and describes himself as an engineer by education, consultant by experience and entrepreneur at heart, and has been part of many successful startups like disruptive, d4.

Underwriting

Growth street uses number of factors to check whether a business qualifies or not, following is the list below:

  1. Current and historic profit before tax.
  2. Current assets and current liabilities.
  3. The stability of the business (which they can establish by reviewing the net assets over time.)

If the borrower is approved, they can borrow from £1,000 to £500,000. Once they become a customer, they will review the status on a regular basis, and may be able to increase the facility limit and decrease the interest rate as the business grows. Growth Street generates their revenues from the interest they charge on the money they lend on behalf of the lenders. There is a monthly fee of 0.4% on the peak amount borrowed and there are no fees for any month in which they don’t borrow. Borrower’s interest rates vary on market conditions and business profile, but usually, they are from 0.2% to 1.25% per month. The representative APR is 11% at an assumed facility utilization rate of 70%.

Capital sources

Growth Street funds come from the group of high net worth individuals and private corporations, led by Art Alliance. In the near future, once they receive appropriate permissions from Financial Conduct Authority (FCA) they are planning to open up the marketplace for everyone who wants to become a lender. Currently, Growth Street has 25 well-trained employees in technical, sales and marketing, and legal department. They have an in-house risk process and underwriting team that does all the analysis and credit approvals. They have a provision fund which basically protects the lender from any defaults or losses. Part of the payment goes to this provision funds and is also protected by mezzanine debt. Lenders place the offers on the platform; they have the provision of either place the bid at market rate or whatever specific rate they want. Lenders get full payment at the end of the tenure and they can decide to lend the money again through the marketplace or withdraw. After assessing the borrower’s profile, borrowers and lenders are matched for 30 days. If the borrower is able to pay before 30 days, a new order is created and is matched with a new lender at a new price, the lender offering the cheapest rate is matched. It is a reverse auction for lenders, each lender will bid an interest rate, and the cheapest rate gets matched first. Typical range borrowers are willing to pay is 8-15%, based on variable risk rate.

Size

The company’s current book stands at “multi-million pounds”, with the target to achieve triple figure million pounds. They are simultaneously also looking for international opportunities. Banks are reluctant to do overdraft because of the minimum capital requirement regulation by BASEL 3. If more than half of the overdraft is used by a business, it cost banks twice as much because of the additional capital buffer required. Another factor is information used by banks to give loans or overdraft is little outdated, as they use historic business data whereas Growth Street uses information via an integrated API, which is live and precise.

The SME Lending space

Research analysis of 160,000, Companies House records showed that UK SME’s, unable to access capital from the banks, are now using £76bn worth of alternative finance. Alternative lending to SME’s is now equivalent to 46% of the value of traditional term loans and overdrafts, which have fallen to £163bn, down 5% from £172bn a year ago, and 17% from £197bn four years ago. If these numbers are anything to go by, Growth Street has a good chance of beating the high street. The Brexit provides another opportunity for the alternative lender to capture the market being exited by continental banks in London.

 

 

George Popescu