One expanding Scottish fintech firm is making successful strides by taking on a failure in financing, reports David Lee.
When LendingCrowd launched in late 2014, it had a very clear purpose: to tackle market failure in access to finance for SMEs.
It was, says chief executive Stuart Lunn, simply too difficult for SMEs to get the money they needed to grow their business. Traditional lenders, especially the main banks, were slow and cumbersome in their decision-making, and even for those SMEs who did have loans approved, the customer service that followed was often poor.
Almost five years on, LendingCrowd has grown significantly – to a business employing 29 people which has loaned almost £60 million to 660 businesses. As it continues to scale up, staff numbers are likely to reach 35 this year and 50 by the end of 2021. It has just signed a debt deal with a major bank and a junior debt partner which will bring in £18.75m to lend across the platform.
Despite the growth of LendingCrowd – and alternative finance platforms generally – the same market failure exists. “In 2014, we saw an opportunity to help SMEs,” says Lunn. “There was a real market failure for businesses borrowing sub-£500,000 and that has not let up. There are a number of factors, such as regulatory capital issues and legacy systems – but also, the appetite to lend is still not necessarily there. It remains an acute issue – especially in Scotland, where the three big banks have 90 per cent of the SME lending market.
“Practically for SMEs, when a bank takes three to four months to make a decision on a loan, that’s an opportunity cost when a business wants to expand. We take an average of seven days from application to drawing down funds; those extra months where they can use funds, rather than wasting time, can have a big effect.
When SMEs are made aware, they are keen to use businesses like LendingCrowd. It’s about speed of delivery but also having someone you can speak to direct and not just being sent to a call centre. Their experience is just not the same when using the banks.Stuart Lunn
“LendingCrowd has been able to take advantage of that market failure but is also working to alleviate that failure. We want to help SMEs to grow; that’s what we all believe in.”
As Scotland’s only fintech lender, LendingCrowd urges SMEs to “think outside the bank” when looking to raise finance – and for professional advisers to be more open-minded too. “There are other options out there, and as Scotland’s only fintech lender, we built fit-for-purpose and efficient systems which get money out much more quickly. But we also built a very strong approach to regulation and credit risk when we started the business, so we are a genuine fintech – strong on both the fin and the tech.”
One of the big challenges for LendingCrowd is raising awareness in the SME community of the alternative lending options. A survey of its borrowers in 2018 showed 65 per cent had been to a big bank first before coming to LendingCrowd, and Lunn wants to shift that balance – especially as almost 90 per cent of those customers said they were likely or very likely to use the platform again, while 100 per cent would recommend the business to others.
“When SMEs are made aware, they are keen to use businesses like LendingCrowd. It’s about speed of delivery but also having someone you can speak to direct and not just being sent to a call centre. Their experience is just not the same when using the banks.”
While LendingCrowd has a strong tech offering, it realises the personal touch is also important for small businesses.
“SMEs generally deal with advisers in their local area – accountants, lawyers and banks – and that’s hard for SMEs as many bank branches close down. There is a greater willingness to engage with technology, but we are marrying that with bringing in business development experts [initially in Edinburgh, Glasgow and Aberdeen]. As banks retreat from business development functions, we are investing in that – we will get it right here in Scotland, then build it out in the rest of the UK. It’s part of educating the marketplace about alternative lending platforms.”
The firm’s focus on business development is all part of its growing momentum. “It takes time to build infrastructure and raise brand awareness,” says Lunn. “There are many inflection points along the way. You need to build certainty and transparency on the asset management side of the business. If you do that, and bring in more funds, you will build up the other side and be able to lend to more businesses.”
Lunn says the £18.75m bank debt deal has validated LendingCrowd as an institutional class platform. “The bank we have partnered with wouldn’t do this without due diligence in terms of our governance, credit policies and procedures, the history of our loan book and ability to service loans. This was a very complex deal but it is transformational for us and as we scale up, it will help to bring other similar parties to the platform.
“It does move us away from being a strict peer-to-peer platform as we evolve into a marketplace model with different types of capital. We have seen that retail investor capital alone cannot satisfy SME demand, even with the increase we have seen from the hugely popular Innovative Finance ISA.”
As LendingCrowd scales up, it has been able to bring on team members in specific disciplines to drive the business forward – including the recruitment of Sir Sandy Crombie, former CEO of Standard Life and Senior Independent Director at Royal Bank of Scotland, as chairman.
“We would not have been able to attract Sandy or anyone of his calibre if we hadn’t built the business the way we did, with that robust regulatory infrastructure and excellent systems,” says Lunn. “And we had to show we could scale the business too.”
Lunn thinks more senior figures in the financial world will become non-executives with growing fintech businesses: “It will happen more but you have to get the right person – it’s not for everybody. Some people who have been inside a big financial services machine find it hard to adjust to a much faster-paced environment where you have to roll your sleeves up. Also, their values have to fit with yours. With Sandy, it’s been a great experience. He has superb pedigree in asset management and banking, as well as governance, but he is also very focused on strategic growth – where will we be in five years and how do we get there? Having that mindset is really important.”
So where does LendingCrowd want to be in the next five years? “On the supply side, we want to bring on other funding partners to get even greater scale and certainty into the capital supply, opening up fresh sources of capital.
“On the demand side, we want LendingCrowd to be the number-one choice for non-bank lending within Scotland for the product we have. We will also continue to lend outside our home territory. I want to own this marketplace, build our brand, develop new origination channels and, as a result, see a significant increase in the businesses we are helping.
“There is no obvious change coming in terms of bank lending to SMEs. That market failure is still there and LendingCrowd is determined to alleviate that – by providing finance to exciting small businesses to help them grow and achieve their ambitions.”