My latest assignment has taken me back to London and the world of dotcom start-ups.
In the cash-strapped UK and US economies, the quest to make cash available to small businesses and individuals is proving an interesting seedbed for start-ups. Several are harnessing the interconnected communication of the web to form mini-capital markets. These disruptive business models steer around the routes taken by the large established players (i.e. banks) who have dominated the scene for so long and create new ways for money to be lent and borrowed directly between those with the money (high net-worths and hedge funds) and those that need it (small businesses and individuals).
These start-ups include:
1) www.marketinvoice.com: the business that I am working with. This is the brainchild of Anil Stocker and Charles Delingpole, two bright, young entrepreneurs who have come out of the City into the dynamic world of business start-up. Marketinvoice is taking a similar approach in the UK market to The Receivables Exchange (see below). By using the web, Marketinvoice offers two communities something that they cannot receive in the existing market:
a) Small businesses can raise cash by putting their invoice receivables up for sale via online auctions. Benefits include:
- No long-term deals that force businesses to pay for funding when it is not needed (as offered by whole turnover deals with banks and other traditional providers).
- No requirement for collateral and guarantees.
- Enabling receivables that may not be covered by traditional invoice finance providers (such as international sales, stage payments and professional services) to be financed.
b) Investors can earn good returns (5 to 20+%) by investing in an asset class (invoice receivables) that has not previously been available to them. The creditworthiness of the underlying debtor, together with the trading history of the seller and the actual purchase of the invoice receivable via a secure legal contract (i.e. they own the receivable after the auction) provide them the security they require to advance money to the seller.
Small businesses and investors who would like to learn more about this innovative new model should visit www.marketinvoice.com or contact info@marketinvoice.com.
2) www.thereceivablesexchange.com is a US-business bringing together similar communities to Marketinvoice: businesses needing cash and individuals/funds with funds to invest. Their model allows small businesses to raise short-term working capital by selling their invoice receivables in e-bay style online auctions to investors. The small businesses benefit by putting cash in the bank without having to wait the 30 or 60 days that their large (and generally creditworthy) customers take to pay. The investors receive returns that they are unable to receive from other sources.
Over US$500m was traded over The Receivables Exchange in their most recent financial year. This begins to show the potential of these new peer-to-peer platforms.
3) www.thefundingcircle.com brings together the same communities again:
- people with cash who are not happy with the returns for deposits available from banks. In this case these individuals do not have to be quite so flush as those investing via the above exchanges. There is no need for £1m+ to play only a few £1,000 will do.
- small businesses who need funding. Banks will either not lend to them or they do not fancy the security or pound of flesh that the banks take in return for their funds.
The Funding Circle pool investors’ funds to spread risk and provides unsecured loans to small businesses at reasonable rates. No banks, just individual investors put together with the small businesses that need their money. Disruptive internet business model – 1; Dinosaur banks with inefficient admin processes – Nil.
4) Zopa (http://uk.zopa.com/ZopaWeb/) describes itself as “the human way of getting a low cost loan. Rather than making the fat cats fatter you pay interest to real people.” By cutting out the middle man it is able to offer competitive loans to individuals and allows investors to spread their risk across a range of borrowers. It has been going for a few years and uses a similar model to the Funding Circle with loans being made to individuals rather than businesses.
I note that Zopa charge a £124.50 transaction fee to every borrower. Although I understand that they need to cover their costs, this is a hefty % to add when the loan size is small, as it almost inevitably will be in the consumer market. It must add quite a bit to their advertised headline interest rate of 8.80% for a £5,000 loan to their most secure A* borrower (+c.2.5% if my calculations are right).
Their own stats show that over £100m of loans have been made via Zopa since it was launched in and that the default rate is only 0.74%. Impressive stuff.
5) www.wonga.com is another start-up aimed at the consumer market. It offers small, short-term loans online with more speed, convenience and flexibility than banks, high street lenders and other websites. They have completely automated the lending application and assessment process, removing the complexity and inflexibility consumers face whenever they need to borrow some cash in a hurry. Although not peer-to-peer the early success of this service since its launch in 2008, show the appeal of this hassle-free borrowing to consumers needing small amounts of money.
These new online lending start-ups are a financial category of genuine and increasing importance. New sources of liquidity for businesses or individuals have been created.The potential for the peer-to-peer marketplaces being set up by Marketinvoice and their ilk is immense. In theory, any business or individual loan can be priced using efficient peer-to-peer market mechanisms enabled by the web. As Betfair has shown in the betting world, there is money to be made and the established players will embrace these new online exchanges as they realise that they are a more efficient version of their own business models.
