P2P lending is set to be a high-growth area over the next few years and the highly successful UK business ThinCats is busily blazing a trail through the Australian P2B – people to business – arena. The ThinCats platform – a first for SMEs in Australia – links wholesale investors to SME borrowers requiring a secured loan of between $50,000 and $2 million.
CANSTAR caught up with ThinCats Australia CEO and Director, Sunil Aranha, to find out a little more about the recent Australian launch.
Q: ThinCats is a very successful UK business brand. What makes this the right time to enter the Australian market?
A: The Big Four Australian Banks have a 91% market share in the SME lending space – a market of some $150 billion – with about $70 billion of lending each year. Banks are generally unwilling to increase lending even to growing businesses if the borrower does not have adequate real estate security to offer as collateral, and in most cases, start-up companies cannot access any debt finance without a track record of at least two years of operation. In this scenario, SME?s unable to access finance to match growth opportunities are limited, and in most instances either do not grow or eventually find themselves in a dire position seeking distress finance.
These are two significant areas of opportunity for the ThinCats lending platform – to assist borrowers to access growth and start up finance at competitive rates and investors to diversify risk across a number of borrowers, while earning attractive returns on a fixed income asset class, previously the domain of banks. We must clarify that the ThinCats platform is focussed on companies seeking growth finance only.
Q: What are the common business financing needs of SMEs?
A: Fundamentally, businesses both small and large need capital for infrastructure, equipment and innovation/R&D (long term capital) and working capital to pay for operational fixed and variable costs, which increase when businesses seek to capture a window of market opportunity.
A good management team that has the empathy and understanding of their financial partners, (banks, non-bank lenders and investors) are able to access finance at the right time to grow. These needs have remained the same over time and in most cases SME?s have had to resort to finance from family and friends by way of both equity and high priced debt in order to capture business opportunity and grow. However in many cases the business simply does not grow if the bank says no.
Each business, depending on the industry, may require a different mix of long-term and working capital finance and will have a differing risk profile with variances in earnings and margins and economic/market conditions, however the fundamental needs are the same. In Australia there is a well-recognised gap between the finance needs of SME?s and what financing they can access from the banks.
Q: On the other side of the coin, lenders seem increasingly willing to invest through P2P and P2B platforms – what is the attraction?
A: The unique proposition of P2B lending, such as with the ThinCats platform, is that lenders (currently sophisticated high net worth investors and their self-managed super funds) can access a fixed income asset class with attractive rates of return (currently upwards of 11% pa), while lending on a secured basis to a large number of SME?s.
All loan applications are vetted and listed for auction on the platform by “Sponsors” (unique to the ThinCats model). Lenders can decide on individual deals they wish to lend to and can bid multiples of a minimum bid of $1,000 per loan. In the current market with low interest rates on fixed income assets, P2B lending can be attractive to lenders wishing to diversify and balance their portfolios – achieving rates of returns that are comparable with investments of a similar risk profile.
Q: Finally, P2P lending would seem to be a prime example of digital disruption. What makes personal and business lending a good target for disruption?
A: P2P Platforms use advanced software, risk and communications technologies to reduce borrowing costs and deliver attractive returns to lenders, effectively cutting out the (banks) middleman.
In the US, Lending Club the most successful P2P player, recently valued at $US7.6 billion following their IPO late last year, have proven a capability to disrupt the traditional banking models in the unsecured lending space; reducing borrowing costs to low risk borrowers on unsecured personal loans by more than 300 basis points (with lower infrastructure costs than a bank), while delivering rates of returns to lenders exceeding 10%.
Default rates are also significantly lower than the banks as new technology and access to big data have enabled more sophisticated credit algorithms to decision loans and deliver low default rates, about 200 basis points lower than the major banks operating in the US credit card space.
In P2B lending the ThinCats model differs from P2P lenders, being primarily a relationship based model, evaluating each loan and borrower separately on a loan-by-loan basis (whilst P2P lenders group loans into designated high risk to low risk categories) and offering loans upwards of $50,000 and average of $250,000 while the sweet spot for P2P lenders is far lower. However the default rates for ThinCats UK, which has been in operation since 2011, are comparable to both the banks in Australia and the international p2p players at about 2% (as at December 2014).
Please visit our website www.thincats.com.au for details on how the platform works and information for lenders, borrowers and alliances.