03 Nov Higher Rates, Higher Risks: Crowdfunding on an unsustainable trajectory
The loan crowdfunding or peer-to-business lending market does not have the best interest of SMEs at heart – or those of lenders, for that matter. Interest rates now often exceed 8%. The only real beneficent of this unsustainable trend are the platforms themselves. A higher interest rate implies a heavier debt burden for the borrower, increasing the risk of future financial difficulties. For crowdfunding investors it’s not always clear that the interest rate does not directly translate to the annual return they can expect.
Platforms could do more to help lenders balance risk and return by being more transparent in how they score risk, and how the risk score relates to the final interest rate. Exponential growth figures of 140% cannot hide the fact that the crowdfunding industry is still maturing. Unsustainable interest rates, a lack of transparency, and poor understanding of risk are key bottlenecks. By addressing these three key challenges, the crowdfunding industry can more quickly fill the funding gap left by the stagnation in bank financing.
The challenges:
- Lack of transparency – the internal, subjective models used by crowdfunding platforms to score risk and set interest rates do not give investors the whole picture;
- Unsustainability – the gradual exit of banks from the SME loan market is enabling platforms and investors to push interest rates ever higher, ultimately profiting no-one;
- Limited understanding – unlike professional investors, crowdfunders should be helped in building healthy portfolios and spreading the risks.
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