What is it?
Peer-2-peer lending is a form of debt financing that allows businesses to borrow money without going through traditional lending routes such as a bank. P2P lending platforms connect individuals looking to lend their money with businesses looking to borrow.
So instead of trying to borrow from a single institution, a business can borrow from dozens, hundreds or even thousands of individual people. This is often an avenue explored by businesses who have been turned down for a loan from a bank. Applications can take as little as 10 minutes and approval rates are high.
Why use it?
You are more likely to get approved for a loan from a P2P lending company than from a bank, especially since banks started viewing smaller loans to smaller businesses as not worth the effort. According to the Small Business Lending Index in March 2016 big banks approved 23% of loans while alternative lenders (such as P2P) approved 60% of loan applications.
Banks typically take 2 weeks to review a loan application and (if successful) up to 60 days to deposit the money in your account, making the process lengthy and drawn out often with low success rates.
With P2P borrowing your application can take as little as 30 minutes to complete and 2 days to be approved by your lending platform, you will then list your opportunity for an average of 7-14 days (this varies based on the amount you seek) and the funds are typically deposited into your account within 1 week of your opportunity closing.
According to a 2015 report by the British Business Bank, ease of application was biggest reason SME’s gave for choosing a type of finance.
No Early Repayment
Furthermore, there are no fees for repaying your loan early, which isn’t always the case for loans from a bank.
By funding your business with P2P lending you can cut out legal fees (such as business loan arrangement fees), get a more competitive interest rate (between 7.9% and 12% for a business bank loan from Santander compared to 5.95% with a P2P loan from Lending Crowd) and negotiate more flexible terms.
Who uses it and what are the criteria?
While it is not yet widely used (The British Business Bank reports that in 2015 only 40% of SME’s were aware of P2P loans as an option), this form of financing suits businesses big and small, looking to raise working capital or funding to purchase assets.
Borrowing criteria varies from platform to platform but most require good credit, a minimum of 2 years filed accounts at Companies House or formally prepared accounts for non-limited businesses, minimum turnover of £50k and a good credit score.
However, unlike with banks your credit score is not the sole basis for a P2P loan. Lending sites such as Funding Circle take a much more holistic approach to approving applications.
Sam Hodges, co-founder and MD of Funding Circle advises:
“Before applying for a P2P loan, ensure your credit score is healthy, get your financials up-to-date and be ready to talk about your experience with credit and how a loan will make a positive impact on your business’ bottom line.”
When Edinburgh based IT company Sort My PC were looking to expand through acquisition they knew they needed to raise capital to make this happen. Instead of going through traditional financing routes Sort My PC’s managing director Gordon Sayers decided to try P2P lending to fund this venture.
They chose to do this through Lending Crowd, a P2P platform who are also based in Edinburgh, UK. Lending Crowd helped Sort My PC to craft their pitch and just 5 weeks after it went live they reached their target of £73,000 sourced from 25 individual investors.
The funding secured through LendingCrowd has given Gordon and the team the working capital they need in order to successfully grow the business, and in the time since they have completed another acquisition and moved to larger premises.
What are the pros and cons?
At their most basic the advantages of P2P lending over traditional finance are:
- A higher chance of approval in a shorter time for borrowers.
- Easy application.
- No charges for repaying your loan early.
- For long term loans, P2P interest rates can be higher than with bank loans.
- Interest rates determined by P2P platforms can be linked to your credit score, bad score = higher interest.
- You have to list your application publicly, which may not be to everyone’s taste.
- Even though these are unsecured loans there can be serious consequences for missing payments, and doing so will likely impact your ability to get another loan.
It’s worth noting that for borrowers the risks are tied to the level of security you have agreed on, in some cases loans are secured against personal assets but this is no different than you would expect from a bank.
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