Submission to Financial Innovation and Payments Unit, Financial System on CROWD-SOURCED EQUITY FUNDING

 Marketlends Submission on Amendment Schedule 1 to the Corporations Law (Crowd-Sourced Funding) Bill

Is Australia up to scratch? Diversify with peer to peer lending

 A look at how the 2008 financial crisis changed the way policy-makers use monetary and fiscal policies.

It’s a bold statement to say that Governments always learn from their mistakes. But, for the most part, they at least attempt to learn from their mistakes and the outcome is generally positive. However, what if a Government got off scot-free and they didn’t really have to learn anything?  This is the case for Australia, but it is not that simple.

Pre-crisis monetary policy was heavily based on one target, inflation, and one policy instrument, the policy rate. It was a heavily one-dimensional and naïve approach to the nuanced and dynamic 21^st century economies that exist today. The assumption being that the policy rate could be manipulated to ensure a stable inflation rate. The stable inflation rate would then lead to a stable output gap. However, after the crisis occurred in 2008, policy-makers realized that this was not enough.  Firstly, they realized the relationship between the policy-rate and the output gap was not as strong as they initially expected. Secondly, a stable inflation rate and output rate does not necessarily ensure that the financial sector is stable.

This has resulted in a global rejuvenated focus on macro-prudential policies in order to stabilize the financial sector. This regulation can take many forms, there is no instrument to stabilize the financial sector. In Australia, we have already seen this with the enforcement of higher capital to credit ratios in the larger banks.

However, is this enough to control the credit market?

Credit is an aspect of the economy that is often over-looked. It was an excess of credit that created a bubble that eventually burst and caused the 2008 financial crisis. Basic macro-prudential policies can prevent this, but is it enough? Is it possible to efficiently enforce regulation on “too big to fail” banks? This was another lesson learned in the crisis; private banks act in self-interest and cannot be trusted to act responsibly with regards to the national and global economy. Post GFC, we have seen the banks focus on residential mortgage lending with little to none in the small to medium enterprise (SME) lending. A large question mark looming over many heads is whether Governments who were not heavily affected by the GFC will learn from these mistakes.

What does this mean for you, the investor?

I think a basic investing principle to decrease risk is the concept of diversification. It is never a wise concept to invest in shares, or property  or both and say I am diversified and protected from any downturn.

Fixed income, either securities, loans e.g. peer to peer lending or corporate debt, is another way to diversify. For many, investing in fixed income is complex and at times hard to understand, but it doesn’t need to be. The simple concept of lending to a SME or a person by participating in peer to peer lending platform, Marketlend, and Ratesetter to name a few that are available to all investors and that are accompanied with loss protection, will give you that diversity. With the added benefit, at least you know where you are invested.

Under the current government, we are heavily reliant on the Chinese economy, we haven’t really diversified and the economic complexity of our exports are low. We also lack the lessons learned in the GFC, and our policy-makers are scared to enforce a set of fiscal policies that include macro-prudency. This raises some questions.  Is our economy stable enough to withstand a recession? A steadily inflating credit market in both China and Australia is beginning to loom over us; are we up to scratch? Is your investment portfolio exposed to China, and if so, how much? Comically, there is a suggestion in the press that we should begin exporting baby milk and this will in some way compensate for the reduction of mining exports. Ask yourself, is this a real solution and is it long lasting? Can’t the Chinese make their own high quality milk formula in the future? It is not like Iron, it doesn’t come from the ground.

Ironically, one of the largest peer to peer lending markets is China, maybe we should import more of their ideas and technology than export our natural resources.

Finding the capital to kick-start your business – invoice financing

Starting a small business can be one of the most exhilarating experiences a person can undertake, which is in part due to the risks and challenges that stand before you. Once you’ve made the decision to tackle the challenge and begin your journey, it becomes quite urgent for you to be able to get your hands on a lot of capital. Unfortunately, not many people share the same enthusiasm that you have with your business and won’t be eager to hand over their funds to help you out. But why is it easier for big businesses to receive massive loans, whilst your smaller loan is mulled over by the big banks?

Bigger businesses are less likely to fail

How has a business grown big? By being successful. Successful businesses generally equal a healthy cash flow. With clear profit results, it’s a lot easier to convince a bank to lend you money. It’s like going to a horse race and having an untried two-year-old take on the defending champ. If you were a gambler, you would go with the tried and tested choice. At the end of the day, as exciting as a new talent is, potential doesn’t mean bills will be paid on time.

Fixed Cost

One of the problems that is completely out of your hands is the cost associated with a loan. Some of the costs are the same, whether you are borrowing a hundred thousand or a million dollars. Because of this, obviously a bank’s margin will be higher on the larger loan. This one is completely out of your hands, and we wouldn’t recommend you borrow more just to appease your bank.

Expensive evaluation

It is much harder to obtain a small business’s records for analysis. This could be because they haven’t been well kept, aren’t available to the public or aren’t exceptionally flattering. Without a certain degree of transparency, you are again deemed to be an excessive risk, simply because the money lender doesn’t know what it’s getting itself into. This factor you can control, but it may not help you if the numbers aren’t on your side either.

Even if you do manage to secure a loan, the process is nowhere near as quick as a larger competitor. This is why more and more small businesses are looking to marketplace lending, peer to peer lending or debt crowdfunding as their new solution.

Leveraging invoice financing to fuel business growth

Cash flow can make or break a small business. You don’t have hundreds of other customers to fall back on to pay their invoice and get you out of a tight spot. You need all of your customers to be pulling their weight, and paying their invoices as they become due. That’s in an ideal world, and more often than not, the business world is not ideal. You have to be ahead of the game and think outside of the box to get your hands on your hard earned money to grow to your full potential. This is where debtor or invoice financing comes into its’ own.

You can rely on your sales

Big businesses gain their security through their assets. Their multimillion dollar property would be the most obvious example. You don’t have that (yet) so your sales really are the life blood of your business. Relying on your own hard work, rather than a non-current asset will grow your business at the appropriate rate for you.

Your business grows with you

When businesses survive the initial startup, they can fail in the growth stage. Success can allow a bank to lend you too much money, which can prove to be too much of a temptation for some. Invoice financing controls the growth at which you are expanding. You don’t have to predict growth; you can only expand as your bank account does. Invoice financing is a much safer option; especially if this is the first time you’ve created a startup. Invoice financing doesn’t mean you have to give away your customers. Your customers will realise that you are funding your business and still you as the supplier. A good invoice financing solution will result in improved customer relations as there is more communication with them by you and the invoice financing solution provider.

You don’t have to offer discounts

A strategy many businesses utilise to guarantee early payment is a discount. You are essentially underselling your product in exchange for an earlier return. With debtor financing or invoice financing, you’re guaranteed the cash flow, and can now afford yourself the luxury of time to receive full payment. This way you are not undervaluing yourself, and receiving the full payment which is rightfully yours.

Personal relief

This one is possibly the reason that will allow you to sleep a lot easier at night. Your personal property won’t have to be used to help finance your tougher times. If you’ve had an exceptionally busy month, which will take a few months to recover all of your payments, two months can be a very long time for your business to live on promises. Instead of having to delve into your own pockets, your invoice financing will leap to your rescue, and ensure you live to fight another day.

Don’t go for a quick solution

When you start looking for invoice or debtor financing, what you are essentially seeking is someone to buy your invoices with ease, without administration hurdles and most importantly at a competitive price. You may find that there are many different solutions that may look cheap at the time of offering, but when you take into account service fees, selection criteria and the short-term nature of their financing, you will find there are only a few offerings that make sense. What makes marketplace lending or peer to peer lending solution of debtor or invoice financing attractive is that you set the term, the rate you are willing to pay and also there are no hidden fees. Your investors are your peers, not some large multinational that may leave you when the times change or they have a restructure or strategy rethink. With marketplace lending you get to say these are my terms and invest now to take advantage of a great opportunity, not what are your terms and can you please lend. More importantly, marketplace lending sets you up for the future because you build an investor base that supports you in your business.

Administration

The biggest downfall of many small businesses is that when they start out, they have only a few people doing tasks or they do it all themselves, but as they grow the administration tasks expand and leave these people bogged down with administration tasks. This is where Marketlend, a well establish marketplace lender also known as a peer to peer lender, not only assists you with the improved cashflow with debtor financing or invoice financing, but also handles all the collections, payments and legal processes.

For more information check out  Marketlend  or call them on 0280066798.

The Danger of “Status Quo”, Credit Card Surcharges, and Interest Rate gouging

Why it is important to stop anti-competitive behaviour in its tracks?

Humans are strange; we are so very opposed to change before it happens and shortly after it happens, but after some time has passed, we quickly adapt. We forget why we are angry, and accept it. This is dangerous behaviour.

Banks, like any institution, hold a lot of clout, politically and financially. An oligarch or four banks governs Australia’s finance, and Australians have grown to accept their behaviour. The banks tell us their questionable behaviour is for “the minimization of risk, and the stability of the sector”, and we accept that. Similarly, many merchants have been abusing their ability to charge credit card surcharges, gouging consumers who choose to use credit.
Over the last few months, the Government began to crack down on this behaviour. So have the people. We realize the ridiculousness of these status quos. Most recently, Westpac has placed an increase of 20 basis points onto their consumer mortgage accounts. This was implemented after the RBA made several interest rate cuts in the last year; the most recent being an interest rate cut in May by 25 basis points, down to 2%. In the same vein, Government regulators have ordered major banks to increase their capital relative to loans; a method to insure that the banks do not collapse as a result of a housing bust.
Instead of lowering their profits, they have passed the costs of this regulation onto the consumer. I think I speak for most Australians when I say I find this ridiculous.

In contrast to many other OECD countries, Australia is governed by these banking oligarchs. They gobbled up our smaller banks after the GFC and we were left with a sector that lacks any sort of competition. The disparity between term deposit interest payments and mortgage interest payments is shocking and unfair. Lack of competition and complete market dominance almost always leads to inefficient solutions. These are solutions where consumers feel helpless, but have to rely on them. I think this is changing, at least I’d like to hope so.

On a positive note, it doesn’t have to be the businesses that change. In this circumstance, I think the technology is changing. Peer to Peer lending or marketplace lending as it is also known globally is allowing us to access a whole range of financial instruments that weren’t available before, and prices that were not available before.

We’re able to acquire trade credit, debtor financing, personal loans, car loans and business loans on reasonable terms. We’re able to choose from a range of different offers from competing platforms, and choose the most competitive option.

P2P lending is disruptive, and it’s here to stay.

The Falling Australian Dollar

When many people think of the idea of a “weaker” Australian dollar, they seem to panic. It’s spread all over the media and positioned as if it was a recession or natural disaster. For investors, the issue is working out the consequences of a falling Australian dollar and the benefits. But first, let’s find the root of the falling Australian dollar, and work upward from there.

 

So, what are some of the possible reasons for a falling Aussie dollar? It isn’t a straightforward answer. It is a sum of certain things happening in the global macro economy over the last few years. The first possible reason is one to do with monetary policy. Many large nations across the globe took part in aggressive quantitative easing over the last 6-7 years. When we increase the volume of a currency, the relative buying power or value of the Australian dollar increases.

 

In addition to this, as growth slows in China, we see a contraction in demand within the commodities market; leading to a plummet in the price of iron ore.

 

A weak Australian dollar isn’t only bad news. The Australian dollar’s strength over the last few years has resulted in a loss of competitiveness within the global economy. A weak dollar should give back some of our much needed competitiveness and contribute to an increase in the volume of net exports. Sectors like tourism, international education, and foreign investment will experience a boost, whilst many of our domestic importers will feel their belts tighten and prices increase.

 

So what’s the market like for an investor? Commodities are not in the greatest place right now, they are sliding down and don’t look to be picking up in the next few weeks. You’ll probably see an increase in demand for domestic goods, instead of buying online from overseas. Companies that rely on exporting overseas and catering to Australian consumers as well are the most attractive investments in these times. The easiest way to do that is through P2P (marketplace) lending, where the borrower is a private company, it’s hard to invest into private companies without connections, and certain Australian marketplace lenders offer investments into lucrative corporate opportunities.

 

In conclusion, a falling dollar isn’t a bad thing at all. It’s probably good news for us right now; there are much bigger fish to fry within the Australian economy. Most diversified portfolios will be able to sustain themselves through this period of economic down turn.

 

Leo Tyndall, CEO of Marketlend,  a P2P lender, Marketlend at marketlend.com.au.

This is not an advice, and any investor should seek independent financial advice prior to investing.

Why P2P facilitators have to have ‘skin in the game’

An un-named regional bank made an unusual statement in an article I read recently;

“Depositors lend them the money, not the individuals.”

 

In my opinion, the comment seems naïve, as I cannot possibly imagine that the majority of depositors see that they are the lenders themselves. The GFC demonstrated that many well-known banks had used depositors’ money to invest into assets that were considerably riskier than what the depositors believed.

 

Many have misconstrued the original concept of P2P lending. In essence, P2P lending is the idea that one party acts as a lender to a stranger, using the facilitators’ guarantee and research as a risk indicator. In contrast, if you are putting money into a fund, a managed investment scheme or debenture scheme, you are not lending to a peer, but you are investing in the facilitator.

 

P2P lending has been a hot topic recently, but it isn’t very clear what the P2P facilitators have invested themselves. By invested, I’m referring to the loss position that they take in the event of a failure of the loan.

 

In a recent interview, the interviewer stated that he believed that a P2P facilitator is unaffected by a recession because they are merely a service provider, not an investor. I corrected him; Marketlend always invests with the investor and takes a first-loss position.

 

It has been proven, over and over again, that a debt facilitator that has their own personal investment within the debts offered, has a lot more tenancy to ensure the realisation or return of those assets in a time of crisis. I refer to this as “skin in the game”.

 

I find that many investors aren’t aware of this, until a crisis occurs. It’s important to draw the fine line between what is and what isn’t having “skin in the game”.

 

Investments into their own personal businesses and provision funds withheld from the borrower, isn’t having “skin in the game”. “Skin in the game” is demonstrating that they have full confidence in the borrower, by using their own money to fund a part of the loan.

 

So when you’re looking at a peer-to-peer investment,  the question you’ll need to ask yourself is:

“What skin in the game does the peer-to-peer lender have?”

 

Many P2P facilitators describe their “loss provision”. It is a very vague and undefined term, thrown around by the facilitator’s marketing consultants. As an investor, don’t be afraid to ask the following questions.

 

How are the loss provision funds obtained, and what is the source of this money? If it’s from the borrower, is it the same money you gave to the borrower? If it is from the margin to be paid to the P2P facilitator, is it a cost that is being added to you? If so, then it is again, your money.

 

P2P lending is lucrative; it is new and exciting. But like anything, make sure you aren’t exposed as an investor. It is very easy to fall into the trap of investing with the facilitator who has the fastest processing time, especially when the economy is doing well.  However you must make sure you research each facilitator and ensure that that they have a loss protection program available.

 

At Marketlend, we invest in every loan and also offer insurance protection to investors if they choose.

 

Every loan has paid on time, and an average of 12% loss protection has been provided on each loan.

Marketlend submission to the government on Facilitating crowd sourced equity funding and reducing compliance costs for small businesses – CSEF

Introduction

Marketlend itself is not a facilitator of crowd-sourced equity funding. However, Marketlend is a facilitator of crowd-sourced debt funding. The two models work very similarly, and as a result of the similarity in models, Marketlend believes that it can input some valuable information regarding CSEF and the reduction of compliance costs.

The differentiation of equity or debt crowdfunding, or separately treating crowdfunding based on equity or debt by the regulation is not considered a good idea by Marketlend. The concept of crowdfunding, and its operation, is similar whether it is debt or equity crowd funding. If small business is to obtain a significant benefit from crowdfunding, it is debt and equity that the Government should consider at the same time.

The role of small business in the economy

We acknowledge that small businesses are a significant driver of the economy. They create jobs, facilitate innovation, competition and are able to cater directly to niches, where larger businesses with subsequently larger over-heads, cannot. In addition to this, we believe that small businesses should not be subject to higher levels of risk due to the lack of their ability to access finance. The origination of small business should be encouraged and compliance costs should be reduced to a minimum. We believe that certain issues discourage the development of small business and thereby disincentive competition and innovation; these two things being large factors in the development of an economy.

Small Businesses and Compliance cost

To begin with, a look into the high compliance costs for newly established businesses is important especially in regards to crowd funding. Later on in the submission, we will discuss the two factors that affect origination of business, but for now we will discuss the compliance costs of funding. At present, it is difficult for a newly originated business to attain funding; if they are without private investors, they typically look to a range of banking services or middle-men that search for investors, for a fee. A lot of time they are unsuccessful.

Access to Finance, with respect to small businesses

Our work in facilitating crowd-sourced debt funding (CSDF), means that we work closely with small businesses. We believe that a major issue in the origination of small businesses is access to funding regardless of debt or equity. The issue boils down to two factors: the ability to access funding and the length of time required for adequate funding.

The ability to access funding is an issue that is systematic in many small businesses in the early stages of development. Small businesses are given a choice; access funding through debt, or through equity.

Contrary to traditional use, most businesses are reluctant to offer equity in the early stages of a business, due to the difficulty in determining evaluation of the business and the perception of the valuation, based on growth expectations versus other valuation methods.
If crowdfunding is to be considered a benefit to small business, it is that small business should be given the benefit of being able to offer various forms of equity and debt. These forms would include securities as a generalised definition, including but not limited to; shares, preferential shares, warrants, convertible debt and bonds.

Financing through debt

Through debt, the majority of small business owners take a large risk. The majority of business loans require security; which for many small business owners is residential property. When security is not given through residential property, interest rates are typically much higher and the ability for the loan to be approved is much lower. However, many business owners, especially those that are young and new to the labour market, do not own residential property. This makes it increasingly hard to gain access to debt, and thereby may prematurely extinguish what could have been a perfectly viable and profitable small business.

Innovative ideas that establish a new business are not so easily accepted by traditional lending institutions so it is unlikely such businesses are able to obtain sufficient funds to operate or proceed to a stage when they are more suitable to a banking funding solution. That is a start-up is unlikely to be financed through present funding sources provided by traditional means and needs crowdfunding in either debt or equity to assist its establishment and growth.

Access to funding through equity

For a lot of small businesses, there is a tendency towards financing through equity funding; typically through friends, family or colleagues. This introduces an extra level of risk, social risk, where many small-business owners have an added level of stress or risk of letting people close to them down. Marketlend believes that this is a large deterrent to the creation of small businesses. Through crowd-sourced funding, this issue is mitigated. In crowd-sourced funding, a level of anonymity is developed; this plays a large role in mitigating the issue of social risk.

Marketlend believes that there should be more feasible ways of raising capital. CSEF is a great option to look into for many businesses. However, of course, CSEF is currently limited by the current laws that surround investment into proprietary companies.

Micro-investment & Transparency

Many believe that micro-investment hinders transparency and accountability; we believe this is incorrect. The current platform for crowd-sourced debt raising (CSDR) is based on a marketplace model. Companies that are not transparent and do not allow investors to gain adequate information before investment, simply do not have their loans funded. These companies must go through the conventional platforms for accessing finance. However, the companies that are transparent and do reveal as much information as possible, are typically the companies that have their debts funded quickly and efficiently. They are rewarded with ease of access to finance and much faster processing times, relative to banks.

Relating this to CSEF is not too difficult. If anything, CSEF promotes transparency even more so than CSDR, as investors accept more risk and play a role in the company after purchasing equity. By using the marketplace model, once again, in the CSEF setting, it allows the companies that are transparent to access finance and those that aren’t, to be denied access to finance through CSEF.

Current legal framework surrounding micro-investment and equity

Current laws, specifically the Corporations Act Sect 113, that limit the number of non-employee share-holders in a proprietary company; are a contentious topic. On one hand, there is the ability for many investors to quickly invest small amounts into a business. Each investor does not bear as much risk and the equity is funded at much faster rates. However, the downside being that a large amount of investors slows the rate at which resolutions can be passed and incentivizes a hold-out dilemma if a company wishes to buy shares back.

Increasing the cap

This however, all relates to what the cap would actually be increased to. The determination of the size of the cap will be dependent on how it is manageable by the intermediate or the company itself and provided that it is sufficiently meeting the required regulatory compliance requirements.

Transparency as a proprietary company with >50 non-employee shareholders

As a solution to the questions regarding transparency, we believe that a proprietary company that surpasses the 50 non-employee shareholder cap should be held under increased reporting obligations. This also provides a solution to those public companies with non-employee shareholders under the newly formed cap that want to return to proprietary status.

The means of communication has significantly developed over recent times and at a significantly reduced cost. Accordin it is possible to enable small-business to communicate the risks and also the benefits to its investors through electronic means.

The present legislation doesn’t fully consider the concept of being able to provide disclosure through electronic means. Not only should it be the case that disclosure should be accepted if it is provided electronically, there should also be an allowance that the verification of investors and the participation of investors below the definition of a sophisticated investor needs to be amended.

Definition of Sophisticated Investor

If permitted to access CSEF, proprietary companies are still required to ensure that the only participants are sophisticated investors unless a prospectus approved by ASIC is provided to the investor, and the offering exemption applies to the proprietary company. As a result there will be no reduction in the compliance costs and few intermediaries willing to assist.

A possible solution would be that a retail investor, being an investor not defined as a sophisticated investor, could be issued a product disclosure document by the proprietary company that is only reviewed on a retrospective basis by ASIC if it seeks to do so. Such a solution would enable proprietary companies to be able to raise money quickly and reduce legal costs in completing such process. Furthermore it would protect investors, because if ASIC found the product disclosure document unsatisfactory it could require investors are made good any loss, if there was any, and also perform an amendment to the document in cases where no loss occurred.

Management accountable to shareholders

It is recognised that whilst it may be attractive for proprietary companies to take advantage of the CSEF, there remains a need for accountability by management to the shareholders.

The environment of crowdfunding is typically electronically advanced and with the recent solutions in the field of cloud based access, a proprietary company could offer shareholders the ability to have access to accounts, and other reporting measures through a cloud technology solution. A proprietary company does have the ability at present to restrict the type of access and provide sufficient information to the shareholders so that they can be completely aware of the progress of the company, but have the same time protect the proprietary company from misuse of such information.

Amend the law to increase the investor base

The law should be amended to increase the 20 investor limit and/or the $2 million limit. A proprietary company does need a lot more than 20 investors or $2 million to enable itself to grow at a sufficient pace within the prison that is the Australian environment. By increasing the limit either by the number of investors or the dollar amount, a proprietary company will gain an ability to open itself to greater participation within the investor market.
Investors do bear the risk that the company may misuse its ability to grow the investor base in an unmanageable manner, however sufficient disclosure as well as suitable compliance management being set in place at the time, as well as suitable intermediaries to assist the management should be able to mitigate such risk. At this time, the law restricts the number of investors and the dollar amount and also restricts the economics for intermediaries to participate in compliance or management of such an investor base.

Increases in shareholder limits should not be temporary

If the increase in shareholder limits was to occur temporarily, and later be cancelled for businesses that took advantage of it, the risk would be that when it is cancelled or removed, investors are at risk of being placed in a difficult position with the company needing to determine how they can either remove investors, or reduce their size to enable themselves to meet the requirements of the law.

If the thought is that temporarily means that it would be brought into play and stay that way for the companies that took advantage of it to see how it progresses, it would reveal the difficulty that crowdfunding is not a short-term concept and the businesses that provide crowdfunding services will have the difficulty of determining how to plan for the future to assist small business.

Ongoing transparency

The establishment of a small business and funding the ongoing costs to operate the small business through the first years, can be difficult. If Australia is to participate in the innovative environment within funding, it needs to embrace the changes that are occurring in the US, the UK and otherwise. The Government can require those who want to access crowdfunding to use electronic means to provide better disclosure and transparency.

Marketlend was interviewed recently by Canstar to discuss its business and what makes it different in peer to peer lending in Australia industry

Peer to Peer (P2P) lending, sometimes called Marketplace Lending, has been around in Australia for several years, but has only just started to take off. Marketlend, a wholly owned subsidiary of Tyndall Capital Pty Ltd, is one of the newer players to market and we caught up with CEO Leo Tyndall for a quick Q&A. See the article at here .

Q: Why can P2P, or Market Lending, provide a better solution to the borrower?

A: Simply put it gives the borrower direct access to investors. In response to your question:

1. It diversifies the lender base for the borrower enabling them to be able to reduce their reliance on the risk appetite of a lender;
2. It offers the borrowers the ability to build their own investor base for future bond or equity offerings;
3. It gives borrowers flexibility in the terms of their loan;
4. It provides the ability to the borrower to offer security that is not centralized around property real estate;
5. In the case of Marketlend there is flexibility to the borrower in the type of product it can obtain, either line of credit, debt finance or inventory finance;
6. It removes a lot of the additional transaction costs by enabling the borrower to bypass the middlemen and go to the capital markets investors to get money and
7. It enables the borrower to get lenders to understand its businesss.

Q: Why can it provide a better solution for lenders?

A: For lenders, it offers:

1. High returns;
2. Direct access to the borrower;
3. A structured environment that gives them analysis of credit, loan management and collection facilities;
4. First loss protection in the form of insurance or cash collateral support;
5. Real time reporting and
6. Transparency.

Q: Does it provide access to people who otherwise could not get a loan?

A: Marketlend will not lend to borrowers who are unable to get credit elsewhere. Marketlend and the investor can see how many queries a borrower has made, and it is not a lender of last resort. As Marketlend invests with you, it will not offer a listing on the marketplace that it is uncomfortable with the risk profile for. Furthermore it will not list or invest in startups or borrowers with defaults.

A: Can borrowers expect better priced loans than through traditional lenders?

Q: When a comparison is made for business loans not secured against property real estate, trade credit or debtor invoicing, it is definitely cheaper, varying between 4-8% in some cases.

Q: How do you manage the investment risk for lenders?

A: Other than the fact that investing in a term deposit has the backing of a rated bank, with insurance and cash collateralization, we would argue that the only increase in risk is the infancy of the industry and lower performance history, to date we have had all loans paid on time and no defaults.

Q: What is the approval process for a loan? How long does it take?  Is it faster than traditional lenders?

A: Approval process is as follows:

1. Borrower enters his details through a website application form on marketlend.com.au;
2. After a 10 page completion, he either electronically signs his application or prints his application and returns the signed application back to Marketlend;
3. Our credit officers are notified of the completed application, they will assess its merits, and determine whether to forward it  assessment through the grading model or reject;
4. Prior to grading, the application, the financials will be assessed by chartered accounts, and a report provided to assist in the grading model;
5. The application is then put through a grading model, which is an automated model that takes approximately 65 factors into account to give a result as to the likelihood of the repayment of principal and all interest to the lender;
6. After the result, the borrower is contacted to advise his grade, expected rate of interest and a commentary is prepared based an interview with the borrower about his business
7. A listing is then put on the marketplace, where investors can bid on the loan
8. This process usually takes around 12 hours, and as it is small business lending, I am told by brokers that this is quite quick and faster than the banks.

A: What risk profile of investor, in your opinion, is suited to P2P lending?

Q: Investors suited to the platform are investors seeking strong returns, with transparency. The investor must understand that this is not a bank, and that the industry is still young. We find we get investors from all areas, and it is the fact that they are disclosed all the facts that they can make their own assessment and chose different risk.

Cynicism, Resentment, and Misinformation: A look at the current criticisms of P2P lending.

As someone involved with a P2P lender and generally interested in new forms of investment through utilisation of new technologies, I’ve noticed the huge amounts of hype and excitement that have been following P2P lending. However, more recently, I’ve also noticed the blatant misinformation and cynicism that have been increasingly circulated through media and journalism.
Firstly, I’d like to state that I’m quite obviously not impartial. I’m quite strictly “for” P2P lending, I think that it’s a lucrative and quite simple technique to diversify. No, I am not against conventional investment at all. The purpose of this article is not to refute the purchase of shares, property or any other sort of conventional investment, it is to refute the people who are quick to shun and discourage P2P lending.
To begin with, I’d like to highlight the value of credibility. The banking sector as a whole has extremely high barriers to entry. Omitting the cost of branches, hiring of labor, and the cost of a proficient and skilled work-force; the cost of obtaining credibility is very expensive. It takes years of experience and existence to develop this credibility, and typically years of little success and profit. However, once credibility is developed, it is an extremely lucrative tool. Once the perception of credibility is developed, banks are able to increase their margins in almost every facet of revenue generation; without much or any significant objection from their customers and clientele.
Often, when I discuss P2P lending with someone who has not quite researched the topic, they are quick to tell me that it sounds like a scam. I agree, sometimes it sounds too good to be true. High rates of return, relatively low fees from the facilitator of the lending, and the ability to gain complete information about the borrower; this sounds like a scam, right? This leads back to my point of credibility. P2P lending is something that is relatively new, although P2P facilitators are growing in number and reputation, they must still make a trade-off to incentivize new customers to switch over. To borrowers, they offer loans that can be quickly funded with much less paper-work. On top of this, they typically offer more affordable interest rate repayments.
To lenders, they offer high interest rates, attempt to inform the lender as much as possible about the risks that the loan possesses, and ease of lending. On a platform like MarketLend, lenders are able to invest as little or as much as they want. They can diversify their own portfolio, by investing in high-risk ventures and lower-risk ventures.

The other term thrown around a lot is, “P2P Lending wouldn’t last a recession”. This term thrown around a lot by armchair economists and “financial gurus”. To begin with, the idea is unsubstantiated. Why would it not last a recession? Sure, riskier classed loans would probably not net a positive return on investment, but what aspect makes P2P lending so much more likely to fold in comparison to conventional banking? Mind you, there have been several banks that have folded in America in the trough of the GFC, it is not like banks are immune to recession. Secondly, empirically, using data from NSR on the LendingClub, a prominent P2P lender in the U.S between 2007-2009, the R.O.I. had significantly decreased, but relative to the stock market and property market, it had been relatively unscathed.

Finally, the resentment and cynicism held by many people stems from fear. Not a fear that P2P lending will crash down the door and kidnap their first-borns, but a fear that their financial knowledge may become increasingly irrelevant in the future. This isn’t true. There is nothing to be afraid about. P2P lending is a new and innovative way of utilising technology and generating benefits for both lenders and borrowers.

So, if you’ve yet to invest into P2P lending, give it a shot. It costs almost nothing to begin with, and is a great way to diversify your portfolio. As P2P lending grows in awareness and reputation, the cynicism and resentment will fade away. Maybe it won’t, but that just means a little less money in their pockets.

 

Why you need loss protection when investing in Peer to Peer lending

If there was one strong lesson learnt from the GFC, amongst many, it was that the issuers who had their own capital invested and at risk in their offerings to investors (“skin in the game”) were the ones that typically survived the GFC, because they took on better risk at the time of obtaining the loan and were more committed to returning capital back to investors. It was their money at risk as well, and in some cases the issuers are the last to get their capital back.

Marketlend is very committed to this concept. It is a wholly owned Australian company that is here for the long term and testimony to that is that we invest with the lenders.  We invest in first loss position and are charged fees for that investment similarly to the lenders.

Protection against losses

• We are the only peer to peer lender in Australia to provide first loss protection which can be as high as 30% in addition to a loss provision. This means we invest with the lenders and suffer the first loss in a situation where a borrower defaults.

• There is a cost to this protection and it is taken into account in the fees paid by the borrower and not charged to the lender. In addition to the loss protection, we also have a provision for losses.

• The only peer to peer lender in Australia with a provision for losses as well as Marketlend is Ratesetter, and based on their figures as of 29 July 2015, they have A$444,372 in the provision, for loans outstanding of 6,034,957 equivalent to 7.36%.

• To date we have invested on average 12.44% in first loss protection and this is individual protection. This means that there is no depletion of the loan protection for one loan if another loan fails, whereas Ratesetter does not offer the same.

• As a note, based on the website of Thincats UK, there are cumulative expected losses of 1.16% for their 5 year period, 2010-2015.
• We do offer insurance on our loans. It presently is only available for our debt finance product. The policy states that where there is a failure by a borrower, this will result in an ability to make a claim on the borrower for 90% of any invoices we purchased. Again we will invest the remaining 10%.
• Marketlend has had no defaults to date.

Fees

At Marketlend, all fees are paid by the borrower, and not from the loan proceeds other than the Loan Listing Fee (0.5%). This is an important point as that if it is paid from the proceeds of the loan, it means the investor is funding the costs.

Below is a snapshot comparison of our fees compared to Thincats.