It’s one of the hottest topics in business finance, yet for all that, there is probably more rumour and misinformation about peer to peer lending than there is on any other topic. Here we take a look at what it is, what it isn’t and why it can be such a compelling solution for both businesses seeking finance and investors looking for a lucrative opportunity.
What is P2P lending?
In P2P lending, a collection of investors group together to lend money to a business. The business gets the necessary cash injection in order to make whatever investment it needs to, and the investors get repayment with interest, resulting in a better yield than they would derive from other investment types. The process is generally undertaken via an online platform and is facilitated by a P2P provider.
How does it work?
The borrower makes an application, much as they would for a conventional bank loan, explaining how much they need to borrow, what it is for and backing this up with the necessary accounts, financial projections and so on. Once approved, the application will be made public on the P2P platform, and investors will be invited to contribute up until the full loan amount is reached.
Isn’t that the same as crowdfunding?
No. Crowdfunding is another popular way of raising money, particularly for a new business venture, and the two are often confused. The big difference is that with P2P you are talking about a loan with interest and repayments. Crowdfunding is a more general term that includes investors buying stock options or simply donating money to a cause or business initiative that they believe in.
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If P2P lending is the same as getting a bank loan, then why not just get a bank loan? There are a couple of advantages that P2P has over the banks – and also a couple of disadvantages.
In general, P2P lending is more accessible. Loans do not usually require security, and if your credit history is less than perfect, you have a better chance of approval for P2P than you would at a high street bank. The downside? If the lender is taking more of a risk on you, they will expect a better return, so interest rates can be higher than those offered on a bank loan.
What’s in it for the investor?
The benefits of P2P from the borrower’s perspective are clear to see, but this form of finance also presents a great opportunity for investors. Today, it is harder than ever to find investment opportunities that offer a yield of more than one or two percent and have an acceptable risk profile. P2P is a compelling choice.
Of course, there is always the possibility of a borrower defaulting on the loan, but most investors spread the risk, making relatively small investments in a number of different projects. Ultimately, this means that even if the occasional one goes south, they see an attractive return on their investment.
To find out more ways to fund your business check out our guide.
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