A Short Guide to Alternative Finance: P2P lending
- Bobby Chadha, Chartered Accountant and Start-Up Mentor at Intuit QuickBooks
- 13.02.2017 12:45 pm P2P lending
Starting your own business can be challenging in today’s competitive and overcrowded market. Even if you have an original idea and a strong team to work with, getting access to and securing finance remains one of the biggest stumbling blocks to overcome. Research has revealed that start-up firms are still too reliant on credit cards, with more than half using credit to keep their businesses afloat.
Luckily there are more options than ever to secure financing, so it’s important to understand the different options you have for getting your business started or keeping it afloat. In this article, I will discuss the key considerations to keep in mind when exploring peer-to-peer (P2P) lending.
P2P lending is a concept that allows you to borrow or lend money directly to other people, cutting out the intermediary banks. With up to 10-15 per cent return on cash, the method is becoming more and more popular with lenders. In the final quarter of 2016 alone, Britain's three biggest platforms collectively lent £843.9 million to businesses and consumers through P2P platforms.
To begin the process, the borrower should request a loan on a website of their choice, such as Ratesetter or Funding Circle, and then go through a credit risk assessment. Once the request has been approved and successfully posted on the website, lenders will start bidding for the auction, trying to offer the most competitive price. The borrower then has the freedom to accept the most attractive bid or even fund their request using money from several lenders.
There are several benefits to P2P lending for both lenders and borrowers. For borrowers, the main benefit lies in being able to source finance, when they may previously have been refused by traditional routes. For lenders, they can often enjoy higher returns on investment than those offered by banks. This is because they are lending directly to borrowers, cutting out the costs of running a bank as well as the typical margin between saving and personal loan rates. Moreover, it gives both lenders and borrowers the freedom to choose their source of finances. This means that lenders can finance the individuals and businesses they feel are least risky, while borrowers have the power to select the most attractive loan rate to them.
There are however, a number of considerations to keep in mind with P2P lending. For instance, the method can be risky for lenders investing in individuals or businesses with poor credit history, as it can leave them exposed to defaults. There is also a danger of lenders getting sucked in by a good story and investing money in a potentially unstable business. Also, getting P2P lending might seem like a daunting task to the borrower as it typically requires more effort and time to process the loan. It is also important to be aware of privacy issues connected with P2P platforms. Borrowers have to understand that their financial information will become publicly available for lenders online, which might rule out the option for some.
Despite some of the uncertainties, P2P lending is rapidly growing in popularity and opens many doors for small businesses. With such attractive offers, it is important for both lenders and borrowers to stay informed of the associated benefits and risks so that they can make the most out of the platforms and fuel future business growth.
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