Posted on: 22 May 2015

What is peer to peer lending?

Peer to peer lending is a form of debt crowdfunding that involves many individuals lending money to an individual or an existing business via an online P2P lending platform.

It is a form of alternative finance that more and more small businesses are using as a business finance solution to raise money for expansion and to fund projects. In fact, according to Nesta, the average growth of the P2P business lending market was 250% between 2012 and 2014.1

The UK is one of the global leaders in peer to peer lending alongside the USA and China. P2P lending platforms are the largest forms of modern finance in the UK2, with lenders anticipated to have lent £1bn in 20143.

Although it is growing, P2P lending is still quite a niche area, as Andrew Hagger, personal finance commentator at MoneyComms, explains. “The IT and technology sectors are more aware of P2P lending than others. But as more businesses are pointed to it through banks such as RBS (who now refers customers to Funding Circle and Assetz Capital), that awareness is only going to go up.”

Why P2P business lending is growing so quickly?

• These days people are used to doing everything online, like reading maps, shopping and telephony, so why not business borrowing too?

• Following the FCA’s decision to regulate the P2P lending market in April 2014, it is now considered a viable alternative to other types of loan.

• In late 2014, the Chancellor talked about potentially setting up a new type of ISA specifically for P2P loans, allaying many investors’ fears about the risks and so making it a more popular investment option for lenders.

• P2P business lending is relatively fast and easy compared to other types of borrowing.

• Interest rates are often lower than are available through other types of finance.

• Fees and other costs can be the lowest on the market. 

• Often (but not always) there are no early repayment charges.

Why choose peer to peer business lending?

Over recent years Britain’s banks have earned themselves an unwelcome reputation for declining too many loan applications from small businesses and charging high interest rates to those who do borrow from them. As a result, more small businesses are raising funds through alternative finance, a market that, as a whole, is predicted to reach £4.4bn this year4.

Not only are small businesses using P2P borrowing more often, but they’re getting positive results as well. For example, turnover grows in 70% of SME business borrowers who raise money through P2P business borrowing. 63% of them see a growth in profit1. That’s a powerful link and a good reason to consider choosing it next time you need funds.

Nesta asked P2P businesses borrowers what they were seeking a loan for: the biggest proportion, 41%, wanted it for expansion and/or growth capital. This lean towards using P2P business loans for growth as opposed to working capital (which is why 85% of business use invoice finance to raise money) might help raise the proportion of high-growth companies in the UK, which has been dwindling in recent years5. Along with the chance of more profitable growth too, the whole economy is set to benefit.

Why small businesses are choosing P2P business lending over bank borrowing?

• Small businesses are disgruntled with the banks, who are often unable to lend to some small business because they fail stringent lending criteria.

• Lower interest rates are available partly because P2P business lending platforms don’t have high street branches to run.

• It’s faster –the speed of access to funding and the ease of platform use are valued highly by P2P business borrowers1.

• It’s easier – 91% of P2P business borrowers think it’s an easier way to get funded than traditional channel1.

• There’s no middleman – the individual lenders put money directly into the business using the P2P platform as a tool to do so.

• It’s up to the public if a business receives the loan, rather than a banking institution.

View our full Peer to Peer Lending Guide or browse through the content below to learn more.

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