When rebuildingsociety.com first began, we thought the auction would be the driver of the site. It has the excitement of watching loans fill up, competitive bidding and it produces all the good PR. But quite soon after we started, we realised that liquidity and choice were equally as important and for some people, more so. Underneath there is a determination to increase the flow of cash into Britain's SMEs, but each investor has their unique way of earning a return. Here are a few different types of investors that we’ve started to characterise:
The Flipper
A Flipper is an investor who is happy to back new auctions with the intention of selling them on to others at a premium. By lending in the auction, the Flipper is going to get micro loans at the highest rate they will ever be and they have the best opportunity to put questions direct to the borrower. In theory, the Flipper will be able to offer the most value to those who want to buy their portfolio on the micro loan market by flipping them straight away, often before the first repayment. If this is done at a premium of 3% within a month, the Flipper has effectively earned 36% AER. The downside of this tactic is that you have to pay attention to auctions on a daily basis and be prepared to be outbid at a moment’s notice. Each Flipper has their maximum exposure ratio too, so anyone new to this tactic should consider their position if a loan they had backed heavily were to fail. We recommend that only those who deem themselves to be a sophisticated investor attempt this high risk / high return strategy.
The Hoover
A Hoover is someone who analyses the micro loan market to assess the best paying deals, often to coincide with a period just before a repayment date, before sweeping up a pre-made portfolio. As the interest on our loans is paid to the micro loan holder at the time of repayment, a well-timed purchase could pocket the buyer a repayment. It can also pay to be cautious as Hoovers can analyse performance in the micro loan market before making a purchase. Of course, if an investor only operates in the micro loan market they miss out on the excitement of the auction and the highest rates for their micro loans. Hoovers can also become Flippers if they sell on at a further premium to another micro loan buyer. This was something we saw happen more with our early loans, which were completed at high rates of interest.
The Holder
Some of our lenders lend to earn the stated return. This is important to keep the flow of funds between Flippers and Hoovers consistent, in turn keeping the live auctions turning over. It is less time-consuming and makes forecasting returns significantly easier. Liquidity is hard to achieve as a Holder and cash would only be released if a borrower refinanced.
So what’s our view? We’re fascinated by the behaviour of our lenders, who have demonstrated themselves to be savvy and entrepreneurial in their approach to lending to businesses. If we view the process as a funnel, the money going in at the top is vitally important, but as the loan matures, the micro loan market creates a stream that siphons off cash, which can be replenished at the top, keeping the whole market moving, so the two markets are interdependent.
We encourage new lenders to experiment with both markets. Since we started, the number of failed loans has dropped dramatically, with the majority now going on to complete, helped in part by the sales of micro loans owned by those whose strategy it is to lend heavily in auctions. Where Hoovers might have been reluctant to take a chance on loans completing, and their cash subsequently laying dormant, the increase in speed and loan completion success might encourage them to bid on the live auctions more.
The good news for everyone is that regardless of your strategy, the returns offered by peer-to-business lending comfortably outstrip many other products on the market. Now is arguably the best time to be involved too. As the market becomes more competitive and businesses are able to command cheaper loans, returns of 15%+ could become increasingly rare.
