In recent years there has been a decrease in start-ups and SMEs turning to commercial lending and, subsequently, an increase in the popularity of “alternative” lending. Peer-to-peer lending offers both borrowers and lenders a better deal than the traditional banking system, and it is starting to challenge the methods businesses are turning to in order to raise funds.
There are still questions and misunderstanding surrounding peer-to-peer funding, however. So here are ten reasons why start-up business and SMEs should consider peer-to-peer lending.
Low interest rates
Rates of borrowing can be quite low with peer-to-peer funding. This is why the model is attractive to lenders as well as savers. This means that business can be spared the high interest rates offered by banks.
The industry will be regulated
From April 2014 the peer-to-peer industry will be formally regulated by the Financial Conduct Authority (FCA). This is set to quash a lot of the doubt surrounding the industry at the moment, because there is the worry that a platform could collapse and take investors’ funds.
The regulation, however, will eliminate this risk, because it will likely insist that any potential outstanding loans will be managed by third parties if they were to collapse. This will mean that there will be more rights for business who use the platform.
Scarcity of traditional means of credit
SMEs and start-up business are all well-aware that credit is not easy to come by, and when it is available it is costly. This has had severe effects on economies around the world. The success and popularity behind peer-to-peer is that lenders and savers both benefit, and for business needing credit it is a financially viable option.
Peer-to-peer lending is straightforward, meaning business will have more time to focus on other matters. And time is money, as we all know. The peer-to-peer method is free of balance sheets, high costs and the reputations that hang over a lot of banks.
When you lend from a bank there aren’t many options that are open to you. With peer-to-peer, however, there are more options. You can choose which company to go for based on how they operate and what their values are. And the benefit here is that there is differentiation.
For instance, peer to peer lending company Folk2Folk operate in the South West of England and this shapes a lot of its values. It supports the local economy by helping local businesses match up to suitable investors. It also requires borrowers to provide a first mortgage over property (other than their home) as security for loans.
Fast access to funds
Peer-to-peer lending offers an efficient process, where business can reach funds quicker than they could in a traditional banking system. Therefore it is the perfect option for business who need funds as soon as possible.
Benefits to local economies
Business that opt for peer-to-peer lending can benefit from the local factor that is absent when lending from traditional means. There are benefits to money staying in the local area – not just the boost and support to the local economy, but by reducing the risk as businesses know each other locally.
The Independent newspaper reported that the British government has vigorously endorsed the business model of peer-to-peer lending and encouraged it to continue to grow.
In the aftermath of the credit crunch, the reputation of banks has no doubt been tarnished in recent years. Peer-to-peer lending does not have this negative reputation that has left us all doubting the integrity of the banking industry.
Many businesses seek funding because opportunities to grow cost money. Having a quick, straightforward and reliable source that allows speedy access to funds and low interest rates means business don’t have to miss out on opportunities for growth and a potential lifeline.