Global small business lender Capify claims peer-to-peer lenders will suffer more than most during a downturn because they lend to risky borrowers for too long, but P2P lenders say the evidence doesn't stack up.
New York-based Capify lends to small business in the US, Canada, Britain and Australia. It introduced so-called merchant cash advances to Australia in 2008 under the name AusVance, which involves a business giving up future credit card takings in return for credit.
Founder David Goldin claims most marketplace or P2P lenders that have sprung up during a period of rock bottom interest rates and low funding costs will not survive a downturn, whereas Capify made it through the GFC despite lending to risky borrowers because it mostly lends short-term.
"Anyone can fund loans – collecting it back is the challenge. In the US when the housing market went down we stopped funding to contractors," he said. Now, Capify is limiting its exposure to companies operating in China.
Risky time frames
"What concerns me today is that you have certain lenders that are lending out three to five years where the [platform] is taking no risk.
"So when things get bad – whether it is here, Australia or the UK – in our world, the ships are only so far out to sea. Six, 10, 15 months.
"The challenge for the marketplace lenders lending for three to five years is your boats are out there, what do you do? You can't bring them back in. So I think on the consumer side of lending, which is the first to go, you are going to start seeing devastating default rates."
P2P lenders say Capify's claims are not reflected in the default rates of personal loans by banks or P2P lenders.
Daniel Foggo, chief executive of P2P lender RateSetter Australia, and Peter Beaumont, CEO of listed marketplace lender DirectMoney, both cited the performance of the oldest P2P lender, UK-based Zopa, which did go through the GFC.
"Through the GFC, defaults on personal loans didn't even double and investors were still getting positive returns," Mr Foggo said.
He also said RateSetter has a provision fund which will cover some of the losses if borrowers stop paying.
Mr Beaumont said Zopa's loan losses rose during the financial crisis, just as they did for all lenders, but these were not high for unsecured loans, at between 2.3 and 4.3 per cent at their worst in 2008. Yields were between 5.6 and 5.9 per cent.
Several of Capify's competitors labelled it the "payday lender of business loans" and say it is pushing extremely high interest rates. But almost all unsecured business loans are well above 20 per cent because businesses are usually higher-risk than consumers.
Since 2010 it has also offered traditional term business loans and more recently lines of credit. It changed its name to Capify in July.
Capify underwrites loans itself, but on Monday Mr Goldin announced it is about to set up another funding source by selling some of its own loans via its own online marketplace.
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