Peer-to-Peer Lending: An Alternative Way To Raise Finance

Peer-to-peer (P2P) and peer-to-business (P2B) lending are becoming an increasingly common choice as a source of raising the necessary capital to get projects off the ground and expand a business.

But according to the 2014 Nesta Report, only 44% of SMEs have even heard of P2B lending, let alone tried it.

What is P2P or P2B lending?

Peer-to-peer lending is essentially just another way of getting a loan, but instead of a bank being the facilitator, the investor of the loan is an unrelated individual known as a peer.

Interest rates are stipulated either directly by lenders or by the lending platforms through which businesses can find a loan term and amount to suit them.

How does it differ to a traditional loan?

Instead of borrowing money from a bank, you’re essentially lending directly from people.

Apart from that, as a borrower there isn’t much difference to your business than getting a loan from a traditional institution.

You’ll still need to analyse all the loan terms and choose the right one for your business, and you’ll still be required to go through credit checks, both by the lending platform itself and an external credit reference agency.

What are the pros?

Almost half of all small businesses are rejected the first time they apply for a bank loan, according to recent government figures. For that reason alone, P2B loans provide an excellent alternative to keeping ideas alive and business expanding.

Since the credit crunch, almost all banks and traditional financial institutions have been extremely cautious with whom they lend money to, constrained by stringent regulations and rigid guidelines which must always be followed.

Peer to business lending doesn’t have the same kind of restraints. Investors are less risk averse and able to provide more bespoke loans to businesses.

SMEs looking to raise finance should consider P2B lending because:

• There’s more flexibility on loan terms and loan amounts

• Borrow anything from £5,000 up to £3 million, and repay from 3 months up to 5 years

• There are options for fixed rate borrowing OR varied interest rates to suit your financial situation

• There’s often no early repayment fee

• It’s fast. You can often have access to funds within a week of your application

• Money is lent from an established community, with many investors having previously been in the same position as your business

What are the cons?

SMEs shouldn’t rush into peer-to-business lending without considering other options, as there are still some negative aspects to take into account:

• There are still strict credit checks, so don’t expect an automatic loan

• Averaging between 7% and 10%, interest rates can be steeper than banks

• There are also upfront arrangement fees, sometimes totaling 5%, to bear in mind

Is it credible?

The peer-to-peer and peer-to-business lending industry is now regulated by the Financial Conduct Authority. There are regulations and procedures which all lending platforms must adhere to.

Many banks are now actually referring their clients to P2P lenders if they are unable to offer loans themselves. Companies like Assetz Capital for example have recently announced partnerships with big named banks like RBS.

Couple this with the rapid and continued growth of the industry (250% in the last two years), and the credibility of P2P lending is clear.

Where to get a P2B loan?

The most common source of P2P loans are from online lending companies. Just like a bank, these act as the intermediary, facilitating the loan process but without all the overhead costs of a traditional financial institution.

Those lending platforms which offer peer-to-business loans include:

• Funding Circle – the first of its kind, which has lent over £500 million to businesses since 2010
• Assetz Capital
• Thin Cats

Can it help my business?

There’s no ‘one-solution-fits-all’ when it comes to raising finance for your small business, but the more options you have to consider, the better chance of finding a source of funding which best suits your current financial needs and situation.

Peer-to-business lending might not be the best option for your SME, and it’s always good to get financial advice from your accountant and discuss the ideal option for you to raise capital.

But it’s still a worthy route to investigate and weigh up against other, more traditional sources of finance. P2B lending is flexible, it’s growing in popularity, and it’s already helped many businesses advance to the next level.

Written by Mandy Mitten, Director of Mitten Clarke, the award winning, leading Chartered Accountancy Firm in Stoke-on-Trent, Staffordshire.

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