Need finance to grow? Then take a look at peer-to-peer lending

6th November 2012

Bypassing the Bank

Peer-to-peer lending makes use of the internet to bring depositors (who have money to lend) and potential borrowers together.

The underlying premise is that peer-to-peer lending offers better returns to the lender than a bank deposit account, and the fees and interest rates for the borrower are less than they would expect to pay to a bank – a win:win!

The providers claim that the process of securing a loan usually only takes a few days.  The terms of the loan may vary, but they are usually fixed rate loans repaid over a specified period.

Your creditworthiness will count

A decent credit history is still a requirement.  The main providers claim to rely more on the experience of their lending panels than credit scoring systems, but it is hard to believe that such systems won’t feature in the process somewhere.

Interest rates for borrowers are based on the risk assessment and the competition to lend (depositors bid on your loan by offering a cheaper rate in a competitive process), so experienced, responsible borrowers are likely to be more successful and secure the lowest rates.

In certain cases, peer- to-peer lending sites have created "credit grades" that make it easier for potential lenders to assess the relative risk of the available lending opportunities.  Depositors will spread their risk by putting their money into a number of different loans – matching their desire for a return with their appetite for risk.

Who are the key players?

Funding Circle is the leading name in the business lending market and has lent £52.5m to date.   Another player is Thin Cats. Providers such as RateSetter and Zopa are more focused on the consumer market.

Tips to secure a loan

We recommend that you approach a peer-to-peer lender in the same way that you would approach a bank, namely with a clear purpose for the loan and evidence that you will be able to pay it back.

Providing an overview of the status of your business and your financial projections will also influence your success.

What about the risks?

As a borrower, it is likely that you will have to provide a personal guarantee, so there is no lesser liability involved in borrowing in this way.

We believe there is a strong probability that default will be jumped on very quickly as the service provider needs to protect the interests of the depositors.  A bank is likely to offer more flexibility if serviceability becomes an issue.

Peer-to-peer lending is a regulatory grey area.  Depositors, for example, will not be protected by the Financial Services Compensation Scheme.

Worth a look

Banks will always have their role to play, but we think P2P lending schemes are at least worth a look.

Don't jump in with both feet.  We can help you look at the individual schemes in more detail and also prepare an application if you decide to go ahead. 

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