Since its stock market debut in 2018, UK online platform Funding Circle has struggled to convince investors that it is the future of small business lending.
But coronavirus has handed Funding Circle and rival online lenders on both sides of the Atlantic a second chance to prove their worth.
Funding Circle shares more than doubled last week after the group won government approval to lend via the small business rescue schemes that the UK and US have assembled to cushion companies from the pandemic.
The euphoric market reaction prompted the company to temper investors’ enthusiasm, welcoming the approval but warning that its long-term impact was uncertain. That reflects a tension facing UK and US online business lenders that have sprung up since the financial crisis.
As banks are criticised for being too slow to get cash into the hands of the smallest businesses, some fintechs see the crisis as a chance to show their credentials. At the same time, a long-held concern has re-emerged: that in times of stress fintechs will struggle to make loans because they lack deep balance sheets and depend on secondary markets for capital.
“We will find out the men from the boys. No doubt there’s going to be some casualties where credit [decisioning] wasn’t robust enough or funding sources weren’t stable enough,” said Ravi Anand, managing director of ThinCats, another lender which is applying to join the UK scheme. “But the ones who come out will be stronger and will get a bigger market share.”
Funding Circle was the first so-called “marketplace lender” to join the UK’s Coronavirus Business Interruption Loan Scheme, and several others are hoping to join in the next few days. Approval is essential to continue issuing loans — despite CBILS’s shortcomings, the government guarantees and lower interest rates mean most lending outside the programme is drying up.
In the US, too, fintechs are banking on being involved in the Small Business Association’s Paycheck Protection Program to stay alive. At the start of this month, Kabbage, for example, stopped making non-PPP loans, saying it was “the government’s turn” to help businesses.
However, they only started being approved days before the $350bn initially allocated by the government ran out. Funding Circle has received thousands of loan applications but has yet to fund them and must wait for Congress to agree on an extension to the programme. Kabbage was able to fund loans through a partnership with a bank before the money ran out.
There are other problems, too. Only banks can go directly to the Federal Reserve or Bank of England for financing. Marketplace lenders sell the majority of loans they originate to third-party investors but, as the UK’s Finance and Leasing Association warned earlier this month, many capital markets are now “essentially closed”.
Ivan Zinn, founding partner at Atalaya Capital Management, which invests in speciality finance credits, said: “Most folks right now don’t have an appetite, certainly on the small business side, to come in and buy assets anywhere near par.” The Fed has said it will eventually buy PPP loans from fintechs, but it remains unclear when this will start.
Lenders warn that the limitations will hurt the smallest businesses, which rely more heavily on online lenders. A third of US small businesses that borrow apply to online lenders, according to the Federal Reserve.
Ryan Metcalf, Funding Circle US head of regulatory affairs, said that most of its applications had come from companies that “had been turned away by their primary financial institutions because they did not have an existing lending relationship with them”. Its average PPP loan size is $50,000, compared with $209,000 across the wider market.
“Yes, there are plenty of people who say ‘these guys don’t have the liquidity,’ but here is a larger recognition that [online lenders] serve the small businesses that are just not served by the rest of the system,” said Sam Taussig, head of policy at Kabbage.
One US regulatory hurdle has been cleared away, though. Late last week, the SBA confirmed that PPP loans would keep their federal guarantee even if they were sold in the secondary market, which lenders said would encourage investors.
One executive at an online lender said, however, that there was “lacklustre appetite” for PPP loans among investors, and until the Fed made funding available directly to non-banks, fintechs would have little choice but to serve as distribution channels to bank partners that act as the lender of record.
Demand for online lenders to help has been deeper in the UK, with politicians calling for their inclusion as banks managed to lend only £1.1bn in the first three weeks of the CBILS. But the start-ups still worry that, like their US counterparts, their participation could be limited by lack of financing.
“The pools [of capital] available to all of us are not endless — if they were, [fintechs] could probably be 30 per cent of the market,” Mr Anand said.
Larger fintechs are hopeful that the 80 per cent government guarantee on CBILS loans will attract funding from institutions such as pension funds. However, the British Business Bank, which manages the CBILS, does not currently allow loans funded by retail investors, which normally account for about a third of Funding Circle’s UK lending, and a much higher percentage at other smaller lenders.
But Mr Metcalf of Funding Circle said he was confident that the industry would pass the test. He said regulators and sceptics of the online business model should “judge us for what we do, and at the end of this they will know how many small businesses we helped and how many jobs we saved”.
*This article has been amended since original publication to reflect that fact that Kabbage has funded PPP loans through a bank partnership