Peer-to-peer lending

Peer-to-peer lending platforms bring investors and borrowers together — delivering value to both.

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What is peer to peer lending?

Essentially, peer-to-peer (P2P) lending platforms provide an online loan matchmaking service. It matches people who have cash to invest — with businesses that want to borrow.

Peer-2-peer lending has only existed for a couple of decades — rising in popularity as the internet has grown. P2P lending providers offer their services online — attempting to operate more efficiently than conventional banks. This enables them to charge lower rates for borrowers — while simultaneously offering investors better returns.

Peer-to-peer lending can be compared with direct lending and is a form of alternative business funding. It is also known as debt crowdfunding or crowdlending.

Peer to peer lending — considerations

Companies that can’t, or don’t want to borrow money from conventional banks — may consider peer-to-peer lending. Here, rather than borrow from a financial institution, you borrow from individuals (investors) willing to lend money — to qualified applicants.

Using a P2P lending website/app, borrowers can connect directly to these investors — cutting out the middleman (banks) in the process. This allows investors to get much higher returns on investment — than would otherwise be possible from a normal savings account. At the same time, this often lets borrowers get loans at discounted rates. An added advantage to borrowers, is that they get access to funds — where banks may be unwilling to lend.

Most of the lending platforms operate in the same basic way. However, each P2P platform sets their own individual rates and terms — so things like eligibility criteria, loan amounts, rates, tenures etc. The majority of these platforms, make their money via taking a cut of any funds raised (commission).

The loans you can get on a P2P platform are usually unsecured (though some are secured) — meaning you do not need any collateral to borrow. As a tradeoff, your company profile will be looked into — in great detail. Moreover, interest rates may be relatively higher — but not always. Like with conventional banking, the stronger your business profile — the better your rates will be.

The difference between peer-to-peer lending and other types of crowdfunding, is that P2P is about loans — rather than equity purchase, rewards or donations.

How does peer to peer lending work?

With peer-to-peer lending, your business would need to pitch its need for getting a loan — through one of several online based P2P platforms. These platforms enable you to showcase your business, to many potential funders and investors — at the same time.

Before your pitch/proposal can be shown to these investors, your company and business plans would have to be vetted — by the platform. Each platform has their own terms and conditions — and some only accept certain types of business. Details on your company, its turnover and the loan purpose — will all be required.

Once you have passed their initial assessment, based on the risk and your credit rating, you will be assigned an appropriate interest rate. Subsequently, your loan request will be opened to their platform of investors and lenders.

Should any investors take a liking to your business and its loan application, they may pledge small amounts of money — that will collectively add up to the sum you want to borrow. In other cases, one or just a handful of investors — will pledge the entire amount you’re looking for.

As soon as you reach your target amount, the funds should be released quickly — as the whole process is highly automated and streamlined. Once you have the funds, you’ll be able to use them as intended.

Repayments are typically paid in monthly installments, but in some cases — repayment plans can be tailored to your needs.

With some peer to peer lending platforms, you will need to reach 100% of your fundraising target — before funds can be advanced. While with others, there’s more leeway — as you may be able to take a smaller amount.

Platforms normally take a percentage of the funds raised — as commission. In addition, there may be others charges — such as payment processing fees. However, almost all lending platforms do not charge initial application and listing fees. Accordingly, if you do not manage to get the funds you need — there’s nothing to pay.

Benefits of peer to peer lending

  • Very accessible
  • A number of different P2P platforms
  • Unsecured loans available
  • Simple straightforward processes
  • Can raise capital very fast
  • A form of debt finance — you’ll retain full control of your business

Limitations of peer to peer lending

  • Interest rates can be high — especially for newer businesses and startups
  • There may be extra charges for using the platform
  • Still need to pass credit checks — like with conventional lending
  • Typically smaller loan amounts raised

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