Peer to peer finance: the book.

book cover for The Lending Club Story

Peter Renton releases The Lending Club Story.

Over the weekend, I sat down with a good book… about peer to peer lending.

The Lending Club Story was penned by Peter Renton, founder of Lendacademy.com , and is one of the first books about crowdlending to hit the shelves and – to the best of my knowledge – the first and only one focusing on the Lending Club story.

Lending Club, as one of the big US P2P Lenders, is a slightly different kettle of fish to FundingKnight or other P2P or P2B Lenders here in the UK (for starters P2P is already regulated in the US…) but despite the differences, it’s an interesting read for UK P2P enthusiasts.

You can Click here to read Peter Renton’s own introduction to his book on www.lendacademy.com including an introductory offer for those exceptionally quick off the mark.

There is a huge amount of detail on lending and borrowing via Lending Club which would be highly useful for US based readers but, for me, the best bit was the description of Lending Club’s journey from tiny start-up to an almost profitable business showing phenomenal growth and jointly leading the US into P2P Finance.

There’s also an interesting foreword from Renaud Laplanche, CEO and founder of Lending Club, in which he shares his motivation for setting up the business:

“I realized how the financial system had become focused on itself rather than its customers, and how consumer lending could be made so much more efficient and deliver so much more value.”

That’s a rallying call if ever I heard one, and one that seems to have motivated Laplanche effectively thus far; “In the 12 months ending September 30, 2012, the total amount of loans issued by Lending Club was over $540 million.  That is more than 150% growth over the preceding 12 months.”

After a slow start and an interruption to let regulation have its say, Lending Club has gone from strength to strength.

What’s interesting for me, as someone watching the development of P2P lending in the UK, is the industry that has built up around the platform.  There are a whole wealth of websites devoted to data mining or evaluating loan notes, which is no surprise given some of the case studies that Renton includes to paint portraits of some of Lending Club’s investors:

“Phillip is a very active Lending Club investor.  He logs on every day to look at new loans that meet his criteria.  He will always sort the available loans by time remaining so he only looks at the new loans that have just been added.  He will spend 30 – 60 minutes every day on Lending Club.

He has a portfolio of around $25,000 invested… and he typically invest $25 or $50 per loan.

Phillip has a second account that he uses mainly for investing on the trading platform*.  He has an interesting strategy here.  He will look for late loans that are for sale on Foliofn that have a deep discount of 90% or more.  He will invest in many of these loans with the hope that some of them will come back to current.  He has only been doing this for a few months and he realizes this is a gamble so he only has a small amount of money in this account.

Like many investors he has most of his liquid investments in the stock market, some in savings accounts and he even put some money into U-Haul Investors Club.  But his Lending Club investment is the one that gets most of his attention and the investment that he enjoys the most.

His goal with his Lending Club account is to keep growing it to where he can make $2,000 a month in interest.”

It’s investors like Phillip which hold the future of P2P finance.  It is there involvement and evangelism that will continue to shift funds away from mainstream banking and into alternative finance.  According to Laplanche, that’s what will help capital flow more efficiently.  Let’s hope he’s right.

*Lending Club’s secondary market

Crowdlending and the banks of the future

back to the future dashboard

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When it comes to crowdlending or peer to peer finance, there is lots of talk about alternative finance, or new finance.  For the time being, that’s exactly what peer to business lending is – a new way of lending and borrowing money.  But what does the future hold?  Is it simply a flash in the plan or is crowdlending part of a wider disruption to the financial status quo that will change the face of banking and finance forever?

Brett King certainly thinks that the entire financial sector is ripe for some serious change.  He’s the man behind movenbank, a new entrant in the US who claim not to be “your typical bank” and who are setting out to launch “a banking experience that is fair, fresh, fast and maybe even fun:)”.

Amongst other things, movenbank are promising:

  • No hidden fees – placing transparency centre stage
  • No plastic – they believe that the future of payments lies with mobile phones and mobile wallets, after all, “when was the last time you were able to see your current account balance on your plastic card?”
  • No paper – application forms, statements and recepits will be online.

He’s also the author of Bank 2.0 and now the newly published Bank 3.0.

We’ll be reporting back on Bank 3.0 once our new copy has winged its way to FundingKnight towers but in the meantime, here’s a snippet from Bank 2.0 that explains better than most why technology and innovation are guaranteed to change the way we live… and bank.

How long do you think it took Facebook to attract 50 million users?  The answer’s not long… in the time that’s elapsed since their launch back in 2004, Facebook has amassed more than 500 million users, rather dwarfing the 50 million users that has historically been considered the point at which something ‘goes mass market’.

It used to be the case that new ideas or new products took time to bed in and become popular.  Now, the speed of technological change and development, coupled with the global connectivity of social networks means that things get adopted into daily life far more quickly.

It took over 70 years for aeroplanes to become a mass market commodity, but now innovations such as the iPod or Facebook reach critical mass almost in the blink of an eye.

Why will that change the way we lend and borrow money?

Well, because it can do nothing but change it.

By 2020 all customers will have grown up being “digital natives” well used to social networking and online transactions.  Already customers value mobile capability and online security and already people expect more personalized, more valuable communications from brands than they used to get from large mass advertising campaign on TV or billboards.

Banking has got to change from a one size fits all (unless you are extremely wealthy) model to a state where customers feel like they are genuine participants in their own financial futures and can make well informed, individual decisions rather than being shoehorned into products that don’t’ speak to their personal circumstances.

Mainstream banks used to see online banking as a way to cut costs and move customers to remote channels… now that couldn’t be further from the reality of what online finance means.

Rather than put space between a brand and its customers, online finance makes it easier to communicate and faster to do business.

Rather than hive customers off into remote channels, online finance provides better value for customers and new ways of doing everything from personal banking to foreign exchange.

Rather than keeping customers apart, it has brought them together in one big global network that can share opinions and provoke customer groundswell in an instant.

New finance is already here, in the guise of new high street banks like Metro Bank, in new entrants like The Currency Cloud who offer low cost, cross border payments and in the new wave of peer to business lenders like FuningKnight, Funding Circle or Thin Cats.

Whether or not such innovations have a long term place in finance is pretty much decided, the bigger question that we will have to wait to understand is just how mainstream banks will make the shift to a new financial order.

After all, as Brett King points out, “The future, in may ways, has already begun.  The only question remaining is how you will make the journey?”

Want to read more about new finance or financial innovation?  Try out some more posts from the FundingKnight blog that we’ve picked out below or, to start you own new finance journey why not sign up to become a FundingKnight lender?  There’s no pressure to lend and no fees if you do… so what’s stopping you taking the next step of your own financial journey?

 

Crowdlending, crowdfunding and what will happen to bank lending?

 

Crowdlending: Just one part of a sharing economy

 

Business finance: A load of shylocks or simply a sector dying to change

 

New finance is the future… FundingKnight makes the Huffington Post

Peer to peer lending: Why Borrow from FundingKnight?

As a small business owner it makes sense for me to ask why would I approach FundingKnight rather than a bank to borrow some funds? I struggle to borrow books from the library so a business loan from anywhere seems like a crazy notion to me but many, many people and companies do it all the time so maybe it’s about time I learnt a little bit more about it.

I asked FundingKnight to explain a bit more about the whys, hows and advantages of going down the crowdlending path.

FK: Here’s a simple answer: a lot of banks say no – they have been advised by the government to build up their capital bases (keep more cash in reserve) and that doesn’t fit very well with lending more money out!

KK: What about the process of approaching FundingKnight compared to a bank?

FK: Lots of businesses don’t like the red tape and bureaucracy of banks – we try to treat people likes names not numbers

KK: Are there other advantages that businesses can benefit from?

FK: Flexibility is a big advantage with borrowing from us. Often business loans let you choose build your own loan.

KK: Like a lovely financial menu?

FK: Exactly. You can borrow for any number of months between 6 and 36 (3 years) rather than choosing between 1 or 3 year products, typically on offer. This could save you a lot of money if you have a decent sized loan that you only need for a few months to cover stock purchase.

Even when loan providers don’t charge early repayment penalties, interest is usually charged for the full period of the loan so it always makes sense to borrow for as short a time as possible.

KK: What about if I need to take a break from paying the loan back?

FK: If you want you can take upfront payment holidays, i.e. you don’t start to repay the loan until after the first three months.

KK: That’s fabulous, and great if I needed an initial investment in my top secret manufacturing venture I am currently thinking about. This would be a perfect solution to any cash flow issues that are bound to happen.

FK: Well, perhaps not.  We only lend to Limited Companies who are registered with Companies House and have been trading in the UK for at least 2 years.  We also take quite a close interest in cash flow projections, but good luck anyway!

So my journey into the rather marvelous world of crowdlending continues. There’s still more to learn but the pieces are beginning to come together nicely.

Crowdlending vs. crowdfunding… what’s the difference and why does it matter?

blackboard with the word 'debt' written on it

Crowdfunding has become a hot topic recently and the news that Kickstarter has will officially launch its UK operation at the end of this month means that it will probably stay in the headlines.

Whilst the concept is still relatively new in the UK, Crowdcube (the UK’s biggest crowdfunding website) has helped to raise £4 million for small businesses and Seedrs – the first UK crowdfunder to be regulated by the FSA – has a target to help 400 business raise cash from private investors each year.

There is a genuine surge of interest in alternative finance and for many the idea of ‘owning’ a part of a start-up seems really appealing.  Frequently the chance to support an appealing new business idea is a stronger motivator than the potential financial return.  There is a “community funding” aspect to crowdfunding, as it tends to select the businesses that are perceived to benefit people.

So, that’s crowdfunding; Basically the process by which a business, which is often – but not always – a start-up raises funding in return for some type of equity deal or reward.

But what about crowdlending?

Well, we started using the term crowdlending to describe FundingKnight just after writing this blog post on whether peer to business lending needs a new name? (Which in turn took inspiration from the Lend Academy blog in the US)

The key point about crowdlending is that no equity changes hands.  FundingKnight lenders, or those using other P2P websites to lend to individuals or businesses, simply provide “loans”.

In return, they get a rate of return on their savings which very often beats that available from traditional easy access savings accounts (which right now are struggling to beat inflation!)  They take no share of the company, have no say in how the company is run and have no voting rights or other control over day to day operations.

So, why might an independent business that’s searching for business finance prefer to take a loan – otherwise known as “debt funding” rather than sharing out equity in their company.

Knowing that it’s a topic close to the heart of FundingKnight’s founder and CEO, Graeme Marshall, I asked him to share some of his thought on why debt can sometimes trump equity when it comes to funding a business.

Here’s what he said:

“I often see company’s approaching Angels for equity when they really should be looking for debt.  It was one of the reasons I started FundingKnight.  Why would someone running his own business want to burden himself with outside shareholders whose agenda will almost always be different from that of the owners?”

So that’s the first key difference between crowdlending and crowdfunding:

Crowdlending = Lenders make loans and borrowers pay them back.  No shares change hands, no control of the business is given up.

 

Crowdfunding = Investors provide a cash injection in return for equity in the business or some other reward.  Usually, they will then have a say in the future of the business / how it is run.

Next, comes the question of what happens when investors – or lenders – want their money back?  It’s a reasonable question since, after all, circumstances change for all of us.  Today’s rainy day fund is tomorrow urgent repair fund so having a way to access an investment is pretty fundamental.

When it comes to business finance, Graeme says,

“The key question is “how is the equity going to be turned into cash?”  Ideally, Shareholders need to be aligned on this point.  If not, there needs to be a clearly understood strategy setting out how new shareholders are going to get their cash.  Listed companies whose shares are traded avoid this problem…. Private companies are a minefield!”

So, there’s the second real difference:

Crowdlending = A scheduled plan of regular payments is agreed upfront detailing how a lender will be repaid their capital + interest.

 

Crowdfunding = Every business needs its own strategy for how shareholders can realise their cash… and not all shareholders will agree on the best way to do this!

 

And that’s why Graeme believes that profitable businesses who are expanding should look to borrow first:

“If the cash required for expansion is to turn into profitable sales of goods or services, they should have the means of repaying the loan out of these profitable sales.  It’s also a good discipline on a company, as if they are not generating the cash to service a loan, is the expansion really profitable?

At the end of the day, every business who borrows money needs to know how they will pay it back.  If you can’t see this clearly, but the cash you need it clearly building long term value, you need equity.”

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