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P2P Investment Guide

Just what is business Peer-to-Peer lending? And what can it do for me?


A businessagent.com guide to Peer-to-Peer (P2P)

 

Just what is Peer-to-Peer lending?

Peer-to-Peer (P2P) lending is a form of investing where people with money who are looking for an income (interest) lend to credit checked individuals and businesses that are looking to borrow. They do so collectively through the P2P lending platforms, which amalgamate the money of those willing to lend.

The platforms source, credit-check the potential borrower, facilitates the loan and automates (as much as possible) the process of lending and borrowing (inclusive of the legal and regulatory requirements) and takes a fee or commission for doing so.

This is what Banks have done with savers (depositors) money for many years, so there is nothing new about the process. What is new is the technology that enables individuals who wish to lend money to connect directly with businesses and individuals that are looking to borrow do so more efficiently (at a lower cost) than the Banks.  In this way lenders on P2P platforms typically receive much higher interest rates for their money than they can presently receive from a savings account and borrowers often receive better rates too (because the higher Bank costs or ‘spread’ isn’t a factor).

It is also useful to know that P2P is also sometimes called crowd lending or debt crowdfunding and P2P lenders are regulated by the Financial Conduct Authority (FCA).

 

It sounds like a high interest savings account

It may sound a bit like a bank or savings account but it isn’t. This is a cash investment, albeit one where you lend your money to a business or individual that is looking to borrow money. You do not have the protections that cash savers have, such as the Financial Services Compensation Scheme (FSCS) which protects £85,000 of persons’ savings per Bank.

As a lender you also lose the Bank buffer from debtors that default; meaning the individual takes on the risks of not receiving the interest/income or being repaid should the debtor be unable to pay it.

 

Are the peer-to-peer platforms regulated?

Yes they are. The platforms are regulated by the Financial Conduct Authority (FCA). They must present information clearly, be honest about the risks of investing should things go wrong and have plans in place should things go wrong. Since April 2017 the peer-to-peer platforms must have at least £50,000 of capital in reserve to act as a buffer to ensure that they can withstand financial shocks or difficulty.

 

Who offers P2P loans?

When P2P started there were a handful of platforms in the UK that connected individuals with money to lend with businesses, or other individuals, who needed a loan. The better known platforms include Funding Circle, Ratesetter and Zopa.  However in the last two years P2P has expanded. Challenger Banks like Metro Bank, specialist Banks like Close Brothers and specialist loan brokers are offering loans through the P2P platforms or using their technology to connect with a wider potential client base than before, particularly in the business loans sector. This is why some observers now refer to P2P as debt crowdfunding.

businessagent.com has a list of P2P platforms in the UK that lend to businesses and includes data that you can use for comparison purposes. P2P Comparison

 

So if my business wants to borrow money I can just cut out the Banks and ask people for it?

You most certainly can cut out the Banks and ask for money from the crowd but it isn’t quite as simple as just turning up and asking for it.

P2P platforms will expect you to fill in detailed forms, provide details of your businesses finances and will run credit checks. In short, the platforms do everything that a Bank would do. What is different about the P2P platforms is that they don’t have the overheads of a Bank and have the benefits of new technology to make things more efficient.  Which means they connect you directly to people who wish to lend you money and will generally process your application and deliver the money (if you are accepted for a loan) faster than the Bank could and, in businessagent.com’s experience, often at better rates and higher values too. However, the due diligence required to check your businesses suitability for a loan is at as high a standard as it would be for other lenders, like Banks.

 

So how do I go about asking for a business P2P loan?

There are many different platforms that offer P2P lending and an increasing number of other players too, like specialist banks, lenders and challenger banks. However the simplest and fastest way to apply for a loan would be to use businessagent.com’s loan application process. Not only does businessagent.com offer you visibility of the UKs P2P market in one place, it also offers the P2P market visibility of any loan application processed by us. This means that you fill in one form for your business and every P2P platform has the chance to offer you a loan if they think you are suitable. Then you get to decide which, if any, loan is right for your business and compare the differing terms, rates and values you are offered.

 

I think the interest on Peer-to-Peer sounds pretty good, how do I know if it is right for me?

The income that P2P offers, particularly relative to cash savings at the moment, does indeed sound attractive. Invest via an IFISA (Innovative Finance ISA) tax wrapper, where you pay no capital gains or income tax up to £20,000 invested this (2017/18) tax year and it can look even more attractive – for instance many IFISAs are offering 5% and above annually at present, some as high as 15% - however, P2P is not for everyone:

  • It is not cash savings but an investment. So there is no Financial Services Compensation Scheme and there is the potential to lose some or all of your money.
  • Your money may not be lent straight away. The platforms match lenders with borrowers and that can take time, particularly if you have a large amount of money to lend as platforms may drip feed the money.
  • All platforms have to pay insurance for a third party debt collection agency, however if the P2P platform were to close or go bust despite this insurance the likelihood is that there would be an impact on your investment. Note: the loan agreement is between you and the borrower, not the borrower and the platform and to date no UK platform has gone bust.
  • If the borrower cannot repay the interest on the loan, or the loan itself, as lender you absorb the risk; i.e. you would lose your money.
  • This is a new sector, growing and evolving every year in the UK. Maturing sectors are expected to come with a few shocks to the system; mergers, acquisitions and the occasional failure. Of course established sectors come with these too (the Banking crisis of 2008 for instance) but in an emerging sector the risk of the impacts of ‘unkown’ events is considered to be higher.

 

If fully aware of the risks of P2P lending you still believe it to be attractive start your research. There are a number of different platforms in the UK offering P2P. businessagent.com offers visibility of the UK P2P market in one place, so is a good place to start your search.

 

How do I go about lending through a P2P site? What do I need?

businessagent.com recommends that you start by researching what the different P2P platforms offer before making a decision as to which platform to lend through. For instance, not all platforms offer an IFISA. It is worth knowing the volume of lending that the platform offers, who it lends to – eg. Businesses and/or individuals, its default rates, how long it has been offering P2P and anticipated interest rates.

Once you are clear about the platform that is right for you they will guide you through the investment application process, which usually takes just minutes to complete although it may take longer for the application to be processed.

 

How do I access my money if I invest through a P2P site?

Every site has a slightly different system, however they all have investor interfaces where you can view the money that you have lent, the capital as yet invested and the income received.

If you wish to redeem, or cash in your investment the platforms will

 

What is an IFISA?

An IFISA- Innovative Finance ISA – is a tax wrapper. This means that if you lend money on a P2P platform through an IFISA you do not pay income or capital gains tax. The amount that you could invest in an IFISA in the 2017/18 tax year is £20,000.

To learn more about IFISAs why not read the businessagent.com guide.


It all sounds very interesting but I’m still not sure.

The best decisions are informed decisions, which is why in addition to doing your own research businessagent.com recommends that before you invest in P2P you speak to a financial adviser. They can help you gain all the facts that you need to make the right decision for your financial needs.

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