Peer to peer lending is a relatively new method of borrowing that does not require the services of financial companies or banks. The lender can be another business, individual or even a group of individuals.
What Are Peer To Peer Loans?
Essentially an unsecured loan, a peer to peer loan is different in whom the lender or lenders are. By borrowing from a private source, not a bank or finance company, you can take advantage of flexible terms and potentially lower interest rates, depending on your financial position.
Peer to peer websites are one of the most frequent platforms for these types of loans, who match the borrower with the appropriate lender. The website platform will then take a fee for their services, which is often factored into the interest rate you have agreed with the lender.
Rates and fees will depend on your company’s credit rating and the risk that the lender is taking by providing the loan. In this regard it is much the same as a traditional unsecured loan from a bank. For the lender, the bigger the risk the higher the interest rates and therefore the potential profits will be.
By bypassing traditional funding services there can be many advantages to be gained. Although these may not be relevant for some, they can provide great benefits for others.
We believe the main advantages include:
- Low Interest Rates
After the financial crisis of 2008, banks and financial institutions alike became less inclined to lend money, especially to small and medium sized companies. Despite the fact that the same credit checks are required for peer-to-peer loans, lenders are more likely to release funding for businesses that might otherwise be deemed unsuitable or too risky. This can be particularly profitable for the lender, because the lower your credit rating the higher the interest rates will be in general.
Low Interest Rates
Despite the same set of principles underlying the practice that is used in traditional methods of lending, the fact that lenders can be sought via the Internet allows them to set interest rates at a much lower level, even for those with a less than ideal credit rating. We believe it is for this reason that peer-to-peer lending has grown in popularity in recent years.
Flexibility can be of great advantage in regards to the terms and condition of a loan. Because the lender and borrower can negotiate these terms to suit both parties' needs, early payment fees, length of loan and payment structure for example, this can make this type of loan more suitable for some compared to the relatively rigid methods of other loan providers.
Some might find the fact that they are not dealing with powerful financial institutions a bonus in regards to peer-to-peer borrowing. This may have, at least in part, explained the rise in popularity in the peer-to-peer sector.
Although the advantages of peer-to-peer lending are great, so are some of the disadvantages. These should be understood and weighed up when making the final decision of whether this method is right for your business.
We believe the main disadvantages include:
- Terms And Conditions
- Lack Of Short Term Options
- Lack of Personal Touch
Terms And Conditions
When applying for any loan you should make sure you have a firm grasp of all terms and conditions before committing, but this is especially important in regards to peer-to-peer borrowing. The advantages of less rigidity can go hand in hand with the disadvantages of potentially less predictability, which is not necessarily a good thing for the terms of a loan.
This has been a particular problem for those who miss payments, with high fees incurred as a penalty, which in turn can make it difficult to keep up with subsequent payments. At the very least, this can affect your credit rating for years to come.
Lack Of Short Term Options
Short term loans can typically be quite difficult to find as the profits available for such a loan may make little investment sense to the lender. For this reason they are generally considered unsuitable or rare in the sector.
Lack of Personal Touch
As with most services that can be accessed online, peer-to-peer loans are convenient, but lack the personal touch that face to face consultations from professional providers may supply. There is also likely less advice and support to be accessed leading to many feeling less confident in the process.
Due to the nature of the peer-to-peer loan, it is vital that you research the provider thoroughly to ensure you are dealing with a reputable company. What’s more, the service each one provides can differ considerably.
We believe some of the most highly regarded providers include:
- Funding Circle
Founded in 2005, Zopa has become the largest peer-to-peer lender in the UK. Zopa’s rates range from 3.9% to 9.9%, depending on the length of the loan. This makes them one of the more affordable providers in the sector.
One of the world leaders, Funding Circle have supplied billions of pounds to businesses across the globe. We believe that lenders using this platform are more inclined to provide funds to companies with poor credit ratings than most of the major peer-to-peer providers.
UK based Ratesetter were launched in 2010 and have become a major investor in small businesses in recent years. They were the first to introduce monthly and yearly investment markets, rates are set at between 3% and 5%, depending on the length of the loan.
If you require a short term loan, one for under 6 or 12 months, then peer-to-peer loans may not be suitable. Invoice factoring, which is the practice of selling the value of outstanding invoices for a fee, may be less risky and a more suitable proposition as the risk tends to reside with the lender.
A similar method to this is the revenue advance loan, where future profits are sold in order to free up cash flow. The factor, or loan provider, can release a percentage of the value of these assets immediately for a fee. This could be a much less risky loan than other types, such as the secured loan.
Secured loans also utilise a company’s assets, namely its physical assets, typically property, as security for the loan provider. Interest rates are low as the risk for the lender is small, but should you find yourself unable to keep up with the terms and conditions of the loan you are liable to lose significant assets, often your home.
Unsecured loans are riskier for the lender and as such are harder to obtain and usually incur higher interest rates. These can come in various shapes and sizes, including fixed rates, where the interest rate is set for the entirety of the loan, or variable, where interest rates can change. The lesser risk involved may make it a popular choice for those who can access this type of loan.