Marketplace Lending



By Barry Edwards

Marketplace Lending

This week two established crowdfunding companies announced that they are expanding into continental Europe. Funding Circle have acquired Zencap previously owned by Rocket Internet, which is a German investment company specialising in technology businesses, to extend their European coverage to Germany, Spain and The Netherlands.

Kabbage, an American company, is linking with ING, a Dutch bank, to develop a partnership in Spain lending up to €100,000 to SME’s. You can read the full details in the press releases in the links below;

These days these organisations like to be called ‘marketplace lenders’ mainly because they have attracted substantial institutional investment for lending and are starting to link with banks to manage SME funding using their automated systems. These two announcements demonstrate the rapid expansion of this Internet based lending process and how the traditional banking and institutional investment community are supporting these businesses.

Many countries have allowed alternative lenders to utilise company and financial information that was only available to banks; this provides the data to properly assess eligible businesses for loans. The whole process takes seconds and providing the company applying already has a business bank account a decision can be given, according to Kabbage, in ten minutes: the money is then made available for use in 24 hours. It is not surprising that SME’s find this process very attractive.

It is very possible that over time most lending to small companies will be processed in this way and these marketplace lenders will be acquired by banks over the next few years. Crowdfunding will then revert to equity investment in early stage companies which is how it evolved in the beginning. The link between the two organisations will probably develop to provide the support many of these young businesses require helping to reduce the high failure rate that is widespread in this sector.

What we are experiencing is a big change in the method of providing the resources to the SME sector improving the prospects of growth for many of these companies that have struggled to find the right kind of finance and advice. This could be the revolution that is desperately needed in the financial community and really change the opportunities for SME’s to make a much greater contribution to economic growth in all countries with the technology systems in place.

It is not surprising that governments are fully behind this approach and changing laws to improve the capital markets contribution to the financial provision available to companies of all sizes. We recently discussed the Capital Markets Union (CMU) that the EU is introducing to make this happen, which should be completed within a few years.

Although marketplace lending and the CMU are evolving separately, the combined effect will transform the process for accessing finance inspiring many entrepreneurs to start and develop businesses. This should make a real difference to growth and employment, especially in Europe, allowing those economies to flourish and take advantage of their true potential.

The financial crisis is still having a lingering affect upon world growth because finance is not being extended to companies that want to grow. These changes to how finance is provided are rapidly evolving, helping to alleviate this problem; we should start to see the effects of that over the next few years reigniting world growth. Technology is finally reaching into the realms of the financial community forcing new ideas upon the staid approach towards SME funding that has prevented many businesses from developing their full potential.

That’s all for this week, more observations next week.