Peer-to-peer lending: The benefits of direct lending to your business
What to look out for
- Red Businesses with lower credit scores have turned to this model of crowd lending
- Amber Lending-based crowdfunding websites have slick, easy-to-use interfaces
- Green Interest rates are normally lower than or comparable with traditional loans
Discover everything you need to know about peer-to-peer lending to small businesses using both secured lending and unsecured lending.
What is peer-to-peer lending?
Every peer-to-peer (P2P) website wants to match those who want to borrow money with people who want to lend, just like our platform. The big difference between peer-to-peer and traditional lending/borrowing is that there’s no bank or financial institution involved. It’s a direct relationship between parties – no trip to the bank needed.
Why would you use peer-to-peer lending?
Peer-to-peer lending, often shortened to P2P, is a kind of direct lending model made possible by the internet.
By using web technology and without bricks-and-mortar operations, there are fewer overheads. This means the benefits can be passed on to both borrowers and lenders in the shape of more competitive interest rates.
P2P lending is very different from traditional routes for borrowing and has become an attractive proposition for small businesses, as well as for personal loans.
Businesses with lower credit scores have turned to this model of crowd lending, perhaps because traditional institutions were not appropriate for their finance needs, or maybe because they have already been refused a loan.
How does peer-to-peer lending work?
The process of borrowing and lending is straightforward and transparent. All transactions take place through the P2P website, which acts as a kind of matchmaker for borrowers and lenders.
Prospective borrowers need to complete an application form that will be assessed by the P2P website’s loans team. They will be looking for evidence that the business is reputable and legitimate. If you want to borrow money you will need to supply some of your business’s financial and trading details.
The loans team will assign a risk score and credit rating to your application and set the interest rate options.
Once the application has been approved it will appear as a listing on the website and can be browsed and investigated by prospective lenders. Lenders can bid whatever sum they are willing to loan and once the listing has ended all loans are consolidated and transferred to the borrower’s account.
In the UK all reputable P2P websites are regulated by the Financial Conduct Authority (FCA). This provides added assurance for both borrowers and lenders. To see if a website is regulated by the FCA, check whether it appears on the FCA’s online Financial Services Register. Websites should also be a member of the P2P Finance Association, which sets rules of conduct for members to promote consumer protection.
What are the costs of peer-to-peer lending?
The P2P platform will typically charge a fee to borrowers (and lenders) for using the service. They may also take a percentage of loan repayments.
Interest rates are normally lower than or comparable with traditional loans. However, if you have a bad credit score interest rates can be significantly higher. This represents the higher level of risk that lenders undertake.
Interest rates will vary from case to case (and from website to website). However, if your credit score is healthy, you may be able to borrow at rates as low as three per cent. Alternatively, if your business has a less-than-stellar credit score you might be looking at interest rates as high as 30 per cent – if your application is agreed at all.
In addition, interest rates are often variable so may change from month to month. Always be sure to understand the finer details of any loan agreement.
Missing a payment or defaulting on a loan will probably affect your credit score and may lead to legal proceedings.
How long does it take to secure peer-to-peer lending?
P2P loans are much quicker to process than going through traditional channels which are subject to the due diligence process and checks on trading and credit information.
Lending-based crowdfunding websites have slick, easy-to-use interfaces that are less intimidating than face-to-face appointments with bank managers.
That said, lenders need to be comfortable with the level of risk and return. As a result, loans may take days or even weeks before they are finalised.
What type of security do I need for peer-to-peer lending?
Typically, most P2P finance applications are unsecured, but some loans can be secured. Secured lending is not common but, where offered, it is normally associated with property transactions.
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Business Loans Links
- Commercial loans explained
- Using commercial loans
- P2P lending advantages
- What is a term loan?
- Why use cash flow loans
- Cash flow finance explained
- How to obtain credit
- Why would you use credit?
- Guide to Government loans
- Costs of unsecured loans
- Guide to unsecured loans
- Small business loan types
- Why use small business loans