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2nd August 2017

How will Brexit affected the P2P lending sector

by Huddle Capital

The 2016 Brexit vote brought about a number of questions across a variety of industries, we will be focussing on the topic of SME lending post-Brexit and how the changes could affect alternative investment lending platforms.

Brexit and loans

In June 2016, surprisingly, the majority UK voter called for Great Britain to exit the European Union. One year on, we are now starting to see the potential impact of Brexit, especially on on small and medium sized businesses (SME) and lending often much-needed capital to them.
Post-Brexit, many P2P lending platforms reported a continued rise in new private and institutional investors lending to the SME sector. This trend rings true across both FCA-authorised platforms and those still awaiting approval.

2016 saw a healthy increase in the total amount of capital invested during the year, with the cumulative total pushed above the £7bn mark. £2.9bn was lent to individuals, with the majority of the total, £4.3bn, going to businesses.

The current climate and immediate reaction of the industry offers a positive outlook for the future, although past figures do not determine the future opportunities. Despite the initial drop of the value of the pound, forecasters predict that the economic future looks to improve but likely at a cost to consumers due to higher inflation rates.

So why is SME lending growing in the aftermath of Brexit?

Many economists believe that UK based businesses could flourish in a post-Brexit economy, with a strong focus on the technology industry. Traditional bank loans, provided by EU-based banks, may be less accessible to businesses post-Brexit. With some EU banks offering special programmes for SME lending, operated under the European Investment Bank (EIB), we may see these companies increasingly seeking alternative investment funds.

With increasing inflation, SME’s are already starting to feel the squeeze. Together with weakening exchange rates, the cost of doing business often rises. This is exacerbated by a potential increase in demand for locally produced goods as foreign imports look to become more expensive. Under these circumstances, SME’s face margin pressure, and short term cash flow challenges. Ultimately, they need external funding to be able to keep their doors open.

As we all know, banks are still not opening their doors to SMEs, or take an inordinate amount of time to make a lending decision, often under circumstances where cash is needed immediately.
With the potential decrease in loan options and a greater need for funding, SME’s turn to friendlier alternative lenders, who are known to turn around a quick decision, getting almost immediate relief for the SME entrepreneur. Peer to peer lending is now the main source of funding for many SME’s, who won’t even attempt to go to their banks any longer.

This increased demand for funding is good news for private and institutional lenders, who are willing to back alternative investments. Such lending helps to diversify an investment portfolio and because of the higher risks associated with SME lending, the returns are commensurately higher, to compensate for this additional risk. Of course, platforms put safety mechanisms in place, like collateral and parental guarantees, which offers hope of at least a proportion of the loan being recovered, in the event of a default.

If you want to learn more about peer to peer lending, then read more of our blogs, check out our FAQs, open an account and if you are successfully approved, you will be able to view the types of loans that borrowers are seeking. Huddle Capital is committed to informing and educating investors about this alternative form of investing.
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