Small Business Lending Q&A
Small Business Lending: Q&A with Kevin Caley of ThinCats, James Meekings of Funding Circle and Anil Stocker of MarketInvoice, moderated by Christine Farnish of P2PFA
The panel started with a discussion of institutional investors’ involvement in P2P lending: Are retail investors going to the pushed out as Caley had suggested in a previous presentation? Meekings differed with Caley, noting that long term sustainability means having a diversified mix of investors – including institutional investors, hedge funds and retail investors. Stocker illustrated his own view with the example of Amazon Web Services and Microsoft Azure, who dominate the cloud web hosting market. Together, these two companies hold about 80% of data and, if something were to happen to them, companies that rely on them would go out of business. Similarly, he noted, If P2P lending relies on institutional investors alone, platforms will be at peril in the event institutional investors pulled their funds during a recession.
The panelists also discussed their platforms’ respective approaches to assessing credit risk. Meekings said Funding Circle has a big data approach to assessing businesses applying for credit, but they also employ human underwriters. MarketInvoice has a similar data driven approach that involves financial stability checks, verification of people's identities within the business, and fraud checks. He also emphasised that institutional investors bring a certain level of interrogation that would be impossible to achieve through retail investors’ sole participation. Caley explained that ThinCats rely on traditional underwriters similar to branch managers because they believe small businesses can’t always properly assess their financing needs.
The discussion then shifted to how the founders think their businesses would perform during contractionary periods of the business cycle. Meekings attested there is indeed risk and Funding Circle run sophisticated stress tests to quantify that risk. He mentioned that the interest buffer is high enough to provide positive returns even in times of recession and the “autobid” feature of the platform that spreads the investment across many businesses allows investors to minimise exposure to one particular company. Stocker noted the importance of diversification and added that the short duration of invoice finance allows investors to adjust their portfolios according to their current risk appetite. Similarly, the team at MarketInvoice themselves monitor macro trends and decrease exposure to certain industries based on the stage of the business cycle.
When asked what business risks kept them awake at night, the panelists named cyber security, execution, and successful deployment of technology.