Peer-to-peer lending – also known as P2P lending, debt crowdfunding and marketplace lending – is an alternative financing model whereby people borrow from other people, rather than going to their bank for a loan. It’s actually an approach to borrowing that predates banks, but its resurgence over the last decade is the result of two primary factors: the reduced willingness of banks to lend as freely following the financial crisis at the end of the 2000s, and the near-ubiquitous access to rapid internet service.
Now there is a good selection of well-established crowdfunding platforms dedicated to marketplace lending for business. These bring together thousands of investors on a website which in most cases simplifies the borrowing process and speeds it up. The business loan application itself works much like any standard bank loan: request an amount, explain its purpose, display recent financial figures and await a decision.
With P2P lending, that decision can be made extremely quickly and, in many cases, the funds released within as little as one week. For the most part, credit checks are still required, company accounts still need to be revealed, and the affordability of loan repayments will be assessed, but companies which have been rejected for business loans from their banks may find a more open-minded audience through P2P lending.
It’s no surprise that seeking alternative finance online is still gaining in popularity. The loan amounts available, application fees, terms and conditions and rates of repayment may vary depending on the peer-to-peer lending platform and the value of the loan. Depending on your business financials and the amount you’re looking to borrow, your loan may be secured or unsecured against assets, and you’ll almost certainly need to offer a personal guarantee. If your business loan application is successful, you’ll probably begin making repayments on the loan within a month or so of receiving it.
It’s important to remember that the consequences of being unable to afford repayments can be just as severe as failing to repay a bank loan: as well as penalties and fees, your credit rating may be adversely affected and your business and/or personal assets may be at risk if you fail to keep up repayments.
But from whom are you borrowing?
The P2P lending platforms themselves aren’t the lenders; they provide the marketplace and interface for lending to take place, and a pool of investors willing to lend. Depending on the platform, the investors may be professional investors or high-net-worth individuals, or everyday people with disposable income seeking a good return on their investment. Some platforms set minimum lending amounts of £10,000, while others set a limit that’s far lower. The main criteria for investing in peer-to-peer business borrowing are that you fully understand the financial risks and never invest more than you can afford to lose.
The return on investment varies by platform, but all investors have a 14-day cooling off period during which time they can change their minds. The industry is regulated by the UK Financial Conduct Authority (FCA), but the Financial Services Compensation Scheme doesn’t apply. Not every platform offers a way of selling on the loan, so it’s essential never to lend money that you may actually need; there’s no guarantee you’ll get it back at all, let alone according to the terms of the loan.
‘Due diligence’ is an absolute must for borrowers and investors alike. It is recommended that all would-be business loan borrowers carefully assess their business strategy and the affordability of fees and loan repayments before signing, and that would-be lenders take independent financial advice if they are not professional investors, and research both platform and the business they are considering lending to. If the sums add up, you can apply for a business loan here and search our marketplace for loan-based investment opportunities here.
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