Cutting Out Middleman Gives Borrowers & Investors A Boost
While it is often described as a peer-to-peer lender for small business loans, strictly speaking Marketlend is an online “social lending” platform that facilitates loans.
A year and a half into its life, financial disruptor Marketlend is gaining traction with its online business lending marketplace, which acts as a conduit between investors and small businesses looking for finance.
While it is often described as a peer-to-peer lender for small business loans, strictly speaking Marketlend is an online “social lending” platform that facilitates loans. Businesses list their loans on the platform, and investors bid, auction-style, to invest. Investors can bid any amount larger than $99.
The businesses get cheaper unsecured business funding than they could otherwise get, and the investors get a floating-rate debt security that fits in their fixed-income allocation, and pays them 9 per cent–12 per cent a year. Marketlend says the average return is running at 13 per cent a year.
So far the Marketlend platform has funded loan parts worth just under $40.5 million in total (a loan part is $100), and has received $23 million in of trade credit applications. It has 719 investors registered, 247 of whom have participated in loans.
“It is the ‘fractionalisation’ of business loans,” says Marketlend founder and chief executive Leo Tyndall. “You can look at it as the ‘eBay of business finance.’
“Essentially, we miniaturise a capital markets bond issue. Upon obtaining rating and execution of credit agreement the loan is listed on a marketplace where investors, verified by Marketlend, can view the details of loan, the results of external checks and all supporting documentation. Investors then make a bid at whatever interest rate within the band set by Marketlend for an amount of their choice below the full amount.
“We put a cap on the rate. We do a risk assessment and we say that the likelihood of repayment is X, and on that basis, the return will be Y, as a maximum cap. The investors can bid anything below that cap, and as a result of that you get a ‘blended’ rate at the end. If an investor bids 20 per cent and that loan settles, that investor will receive 20 per cent on that loan for the amount that they invested.”
Tyndall says Marketlend funding is “about 4 per cent–8 per cent cheaper” than most of the other unsecured lending that is out there in the market. “It’s only on the debtor finance where we’re one or two per cent higher than bank overdraft rates, and the answer to that is because we’re not taking the same security as the bank is, we should be a little bit higher. “
Marketlend is not literally peer-to-peer lending, because every loan is secured in a special purpose company or trust protected by an independent trustee, Australian Executors Trustee Limited (part of ASX-listed financial services company IOOF Group). This means that the investor holds a tradeable secured note from the trustee: these can be traded on the Marketlend Note exchange.
Tyndall says the platform has a “pipeline” – that is, borrowers who would like to borrow through Marketlend – of $22 million, but it does not yet have the investor funding to fulfil that. He says Marketlend will raise US$10 million from US investors by the end of June. “Essentially, we’ve told most of those people wanting the bigger licks of funding to give us some time. As soon as we get the larger amounts of money we can start filling those orders,” he says.
Marketlend is primarily a platform for wholesale, sophisticated and professional investors to directly provide debt to business borrowers, but retail investors who do not meet the definition of a “sophisticated investor” – that is, having net assets of $2.5 million and an annual income in the last two years of more than $250,000 – can still participate, because of an ASIC Class Order that effectively allows Marketlend to be considered as a “business introduction service.” Tyndall says self-managed super funds (SMSFs) are “ideally suited” to investing in Marketlend.
“One of the major unforeseen problems in the Australian investment environment is that SMSFs have effectively been forced to take equity risk, in dividend-paying shares and bank hybrids, to get decent returns,” he says. “Investing in direct loans through Marketlend can be a real alternative in their fixed-income allocation.
“Instead of a hybrid or a corporate bond, which has no real security other than the company itself, this is a debt instrument, a loan. It is a risk, but not in the high-risk category, in fact it can reduce some of the risk profile brought about by equity risk and bank hybrid risk,” says Tyndall.
Marketlend - the new Australian financial marketplace
The loans are for working capital – including a line of credit linked to invoices – as well as traditional business lending, commercial property loans, and trade, debtor and inventory finance.
The working capital loan – which represents the bulk of the book – is an alternative to corporate credit cards and bank trade credit facilities. Marketlend gives a borrower 90 per cent of its outstanding invoices immediately, and pays the balance when the rest of the money comes in. Borrowers get the commercial advantage of paying suppliers and service providers overnight.
Marketlend obtains personal guarantees from borrowers, obtains a rating and executes a credit agreement. The loan is then listed on the platform, and opened for investment.
Marketlend invests in every loan on the platform – it accepts losses up to at least 2.5 per cent of the loan value. Risk is also mitigated by insurance (provided by QBE), where the trade credit deal qualifies. The policy covers up to 90 per cent of the value of the trade receivable
“Investors have the choice between insured and uninsured loans, with a commensurate difference in returns,” says Tyndall. “The uninsured portion of the book pays an average lending rate of about 18 per cent, some of them get up to 22 per cent, and the insured portion sits between 12 per cent–16 per cent, depending on the risk profile of the underlying transaction. We see the insured portion as suiting SMSFs best,” he says.
For more information on Marketlend visit https://www.marketlend.com.au/.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au