So what is this method? It’s peer-to-peer (P2P) lending and it’s is gaining momentum. P2P provides a new platform for helping people secure loans. Small businesses and budding start-ups are starting to use P2P lending as an alternative option to loans and banks. As this new trend becomes more commonplace, it’s wise to have a good understanding of what P2P lending is and how it can impact an individual and business’ finances.
What is P2P lending?
P2P lending is essentially a loaning platform. This platform allows an individual to get a loan from a different individual through a P2P network. There are facilitators who have websites for P2P lending. The facilitators liaise with people who are in need of money and connect them to people who lend money, otherwise known as investors. The facilitators are in charge of linking these two individuals together, in order to initiate a lending process. Once the individuals have been linked, they can discuss the amount of loan they need and are willing to give. Often, you will find that one investor does not loan the full amount of money requested by the individual in need. Rather, investors diversify their loans, by distributing small amounts of money across a multitude of loans, which helps spread the risk of their investment.
Currently, with P2P, individuals have to submit a loan application on one of the facilitator’s websites. The loan request is then posted by the site and interested investors can begin putting small funding amounts onto the listing. Sometimes a listing will have an end date or deadline to receive funding. If the amount of funding hasn’t been met by the deadline, individuals have the chance to take what has been raised or decline the loan.
How is P2P lending different?
P2P lending differs from other lending platforms, as P2P lending does not loan businesses money. Hence the name, peer-to-peer. Therefore, the transaction goes between individuals and the loan must go to the individual. However, this doesn’t stop an individual using the loan for their business.
For example, there is a small craft beer brewing start up starting to produce beers locally. However, in order to grow their infrastructure they need a loan. The business can’t produce more because they can’t afford to buy more ingredients than what their current budget allows. This restricts the business’ growth as their brewery inventory is limited. With a P2P loan, the individual owner of the brewery can use the loan to purchase more hops and other specialty ingredients to enhance and facilitate a bigger brewery inventory. Now, with a larger brewery inventory, they can produce more and sell more, increasing overall profits and encouraging the growth of their small craft beer business.
Who should use P2P lending?
Funding still remains a concern for many small and medium businesses, especially in the UK. P2P lending is a good option for small businesses that are not eligible for loans from a bank. In addition, the interest rates are often much lower than banks. It’s important to note that it normally takes 7-14 days for a loan to receive funding, which is quicker than the majority of banks.
There are always pros and cons to securing any type of loan, but P2P lending can be a viable source of funding for small businesses to get their feet off the ground. Sourcing for adequate funding if often one of the biggest challenges for small and medium enterprises so here are some ways they can reduce costs.