Arlingclose and Funding Circle launch peer-to-peer lending partnership

David Blake is a client director with Arlingclose who are launching a partnership with the peer-to-peer lending platform, Funding Circle.

Room151: David, tell us about this new partnership.

David Blake: Basically, we have been looking at clients’ requirements with regards to treasury needs in an environment of low yields and low returns and we started thinking about how can we increase those returns? At the same time we’re also hearing from a lot of our clients that they want to help economic development initiatives in their areas and they’d like to support the flow of capital to small to medium size enterprises (SMEs). That’s what got us in touch with Funding Circle, a peer-to-peer lender who facilitate lending between investors and SMEs.

R151: So for the uninitiated, what do Funding Circle do?

DB: They basically provide an online platform which matches investors to borrowers and facilitate the transactions between them. Crucially, they are very choosy about which SMEs they allow onto the platform and careful about the credit worthiness of borrowers. Security, clearly is paramount for local authority investors and there are parameters in place to assess whether a loan is affordable to a business, what their history of paying debt is like and whether or not the business is healthy. They use external credit providers like Experian to check credit histories and also use their own in-house analysis as well. We’ve done a lot of due diligence on that to ensure those credit checks and the security element is appropriate for our client base.

R151: Currently the platform matches largely retail investors with lenders. What kind of experience have they had in terms of defaults and returns?

DB: They’ve been having a pretty good time of it and that’s one of the attractive things. There is an estimated annual bad debt rate but at the moment that’s running at around 2.1% which you have to set against the level of returns we’re seeing on the platform which are around 9% gross and 6% net of fees and losses.

R151: OK, so a pretty big difference then between that and some of the traditional treasury investments?

DB: Yes, there’s a significant uplift but we need to draw the distinction between short-dated cashflow type investments and opportunities for core cash, which this would fall into. So our clients would be looking at cash they had available for longer-term, more strategic investments and perhaps allocate from that.

R151: What level of allocation would you expect them to consider?

DB: I think they’d be quite small to begin with. We have seen some local authorities dipping a toe in the water already; Lancashire for example are involved and one or two others are primed to go. The Department of Business, Innovations and Skills, under the Business Finance Partnership will be lending £20m to SMEs through the platform from March 2013. I think even if it’s less than 5-10% of your portfolio, sums maybe of £1m, £5m perhaps £10m for the larger authorities, that will make a significant difference to both the SME sector and the average returns across a diversified local authority investment portfolio.

R151: Does the platform have the capacity to offer that level of investment without the credit quality of SMEs taking a hit?

DB: Well that’s one of the reasons why Funding Circle is interested in the local authority sector because they recognise the benefits of having local authorities on board who can then promote the opportunity to creditworthy local businesses and help grow both sides of the book. We estimate the SME lending market to be at least £7.3bn of new loans each month, so there is plenty of room to grow.

R151: Local authorities are lending a lot to one another these days – will there be the opportunity for locals to borrow from each other on the platform as well as invest?

DB: We’ve explored this and I think that opportunity will be more limited. The local to local borrowing that goes on tends to be for shorter dates, very low yield and fairly tight margins. That’s traditionally done through brokers at the moment and they’re quite efficient at dealing with those types of short-term transactions, as you’d expect.

R151: What’s the commercial angle for Arlingclose in this partnership?

DB: Well we’re interested firstly because we think it’s a good opportunity for our clients to diversify their portfolios and increase risk-weighted returns. That’s the primary driver but also we think it’s quite a unique opportunity and we hope that local authorities we’re not currently speaking to will want to get involved and benefit from our advice.