Crowdfunding is a relatively new practice in financial services and is introducing a social element to the basic principles of lending and borrowing. The best known crowdfunding brands have a peer to peer model where individuals lend and borrow to each other via online marketplaces. However, the area of the market that seems set for the biggest growth over the next few years is peer to business lending – whereby unsecured commercial loans are funded by a portfolio of investors drawn from all walks of life.
The demand is certainly there for this product. According to the Federation of Small Businesses, 40 per cent of businesses that have applied for finance this year have been turned down. Many of them no doubt are clients of advisers reading this blog. Crowdfunding offers those advisers the chance to find their clients a solution, and earn introducer fees along the way.
So where is the supply of funds going to come from? Well, retail savings rates are on the floor, with the majority of accounts paying a rate lower than inflation. Contrast that with the crowdfunding industry where investors can choose the rate they want to lend at – which could be eight per cent or even as high as fifteen per cent depending on the profile of the investment opportunity and the risk appetite of the lender.
Either way, the deal will most likely be on better terms than a bank would offer for both sides, and popular funding applications can get filled within just a few days. Not only that, but in a great many instances crowdfunded loans can be completed where banks would not approve them.
The social aspect goes beyond people helping each other with basic financial needs though. It’s also a great opportunity for the lenders to add value to businesses. By connecting the two parties socially, there is an opportunity for investors to ask questions, offer advice or potentially take a bigger role in the business. And the borrower can leverage the experience and expertise of their lenders, and in many cases benefit from their custom if they’re offering easily accessible local or online services.
It’s altogether much more engaging and rewarding, and that’s why it’s gathering pace as such a great opportunity for advisers and their commercial clients alike.
Julian Wells is marketing adviser & head of introducer channel, rebuildingsociety.com