1. eCommerce lenders
The eCommerce boom created millions of small businesses all over the world. Many of these businesses are reliant on third-party companies to market and distribute their products (e.g. Amazon or Etsy), or manage their payments (e.g. Square or PayPal).
These third-party companies are in a unique position to collect valuable pockets of data that can be used to predict the ability of a small business to repay short-term credit.
They are also in a unique position to collect credit repayments from the small businesses at point of sale.
Take PayPal Working Capital, which has provided over £400m in short-term loans to UK small businesses, and over $3bn worldwide. PayPal offers the loans to merchants selling over eBay (PayPal's parent company until July 2015) and taking payments via PayPal. When making a lending decision, PayPal can review and verify all incoming payments made via PayPal to judge credit worthiness. And when collecting the debt, they can take payments direct from the incoming sales revenue.
Amazon Lending offers a range of short-term working capital lending products to the small businesses that sell their wares over the Amazon marketplace. Like PayPal, Amazon has lent over $3bn from its own balance sheet. Amazon offers the loans across ten of its key international markets, deducting loan payments every two weeks direct from its sellers account. If the money isn't there, Amazon can put a freeze on stock held in its warehouses.
Perhaps the most advanced offering comes from Alibaba's Ant Financial business (which includes Alipay, the popular Chinese online payments product). Whilst Ant Financial has plans that go way beyond lending to small businesses, this has been a core part of its growth. Ant Financial operates a similar model to Amazon and PayPal, but has led the way in utilising new data to improve credit decisions. In 2015 the company launched Sesame, its credit scoring service that reviews user profiles and behavioural data from Alibaba's eCommerce platforms.
The peer-to-peer lending model was originally conceived as a way for individuals to lend directly to other individuals.
The model was quickly modified – most notably by Funding Circle – to enable individuals to lend direct to small businesses in the form of straightforward term loans.
The model has been modified again by the likes of MarketInvoice, whereby high-net-worth individuals can lend purchase a proportion of an SME’s outstanding invoices in order to free working capital.
New models are emerging all the time.
The British Business Bank has supported peer-to-peer business lending by becoming a lender on platforms like Funding Circle and MarketInvoice as part of its programme to increase SME lending.
In the UK, peer-to-peer business lenders have lent nearly £1.3bn already this year.1
Deloitte has studied the peer-to-peer lending industry in depth, arguing that the cost of capital and cost of acquisition for such lenders was (and would remain) at a level that made it difficult for the platforms to price loans competitively in the long-term.
Other new SME lenders have approached the sector with a direct lending model. Companies such as Spotcap and IWOCA have raised debt capital and offered easy-to-access loan products for the smaller businesses that banks are more reluctant to lend to.
Unlike peer-to-peer lenders, these lenders assume balance sheet risk themselves and seek to make a profit in the margin between the rates they take on their own debt, and the loan rates they offer to businesses. Within this margin the business must fund its operations and marketing costs – neither of which are likely to scale at low cost.
Different models have emerged within this space, such as merchant cash advance lending, through companies such as Liberis. This model of lending is popular with independent high street shops which use card terminals to receive payments. Data from the terminals can be used in credit checking, and repayments are based on a proportion of all payments made through the terminals.