Whether you need an injection of cash to pay off debt or you're looking to raise additional capital to help fund research for a new product, peer to peer lending provides businesses with a non-traditional loan.
Peer to peer lending is a relatively simple way for investors to lend money to individuals and businesses who are looking to raise capital relatively quickly. Peer to peer lending (P2P) is an attractive form of investing for people with private capital to invest because it often offers greater returns compared with traditional savings accounts.
There are several different types of P2P lending, but the main ones include:
Peer to peer lending works by matching borrowers with lenders. Traditionally this was done through a broker, however, increasingly it's being done online through dedicated peer to peer lending platforms.
If you're looking for online peer to peer lending, you'll need to apply to a P2P platform and complete the relevant forms. Based on the information you've submitted, you will be subject to a credit check to gauge your suitability and this will impact the APR you'll be quoted.
Once you're happy with the terms set out, an underwriter will make the final decision about your lending terms and whether you're a suitable candidate to receive the loan. Once the loan has been paid, you will need to make the repayments set out in the terms, which will then be passed onto the individual lenders.
Peer to peer loans can be secured and unsecured, so making sure you understand the terms of the loan is important.
Unsurprisingly, the peer to peer lending market is driven by SME financing as small businesses tend to struggle to receive the capital they need from traditional financing avenues, whilst investors are turning towards P2P lending as it offers them more favourable returns and provides excellent opportunities for them to diversify their investment portfolios.
Peer to peer lending platforms are regulated by the Financial Conduct Authority (FSCS), however, P2P lending itself is not covered by the FSCS and you can search their register to find which platforms are regulated. This protects lenders from malpractice by the provider, however, if the platform itself goes bankrupt, the lender's money could be lost.
Like any form of investment, peer to peer lending puts capital at risk, however, safeguards are put in place to ensure lenders' risks are low.
Like all forms of lending, there are advantages and disadvantages of peer to peer in business.
Yes. Any money received through peer to peer lending is seen as income and is subject to tax. However, if you open an Innovative Finance ISA (IFISA) you can receive interest from P2P loans tax-free and avoid being taxed on any capital gains and you won't need to declare any ISA interest, income or capital gains to HM Revenue & Customs on any gains in an IFISA.
In recent years crowdfunding has been a great way for SMEs to raise capital and even big businesses like Sony have used crowdfunding to fund new projects. Peer to peer financing is a form of crowdfunding. However, the key difference is unlike equity crowdfunding where the investors get a share in the company (equity), peer to peer lending is more of a loan with more traditional repayment terms.
Peer to peer loans tend to be better suited to established businesses who know they are able to make the monthly loan repayments.
The majority of peer to peer lending occurs online and is serviced by specialist online peer to peer lending platforms.
Both investors and borrowers must sign up for a P2P platform and the transaction takes place via the platform. The platform carries out all due diligence checks for all parties involved and determines a risk rating, which will then align with the level of risk an investor is willing to take.
P2P platforms make money by charging users a setup fee and tend to be paid by the borrower for reimbursement for services rendered i.e., the costs involved in finding investors and carrying out credit checks.
Throughout the loan period, interest is charged and a percentage of that interest will go to the platform itself with the rest being paid to the investor.
Currently, platforms do not have to disclose the margins they are taking, which makes it hard for both borrowers and lenders to compare different platforms, however, as P2P lending increases in popularity, the FCA is pushing for more transparency within the sector.
If you've been refused a loan elsewhere and you have an established trading history then peer to peer lending could be a great way of debt financing. However, before you proceed there are a few questions you should consider:
We understand that raising capital is an important part of running a business, which is why we have a range of funding for businesses like yours.
As an alternative lender to banks, we specialise in providing tailored financial solutions for SMEs. Offering fast, flexible and manageable terms, get in touch with us today and discover how Nucleus can help you.
4 August, 2022