Peer-2-peer (P2P) loans are one of a number of alternative ways for businesses to raise much needed finance. One of the more recent additions to the alternative finance market, is it a method that your business should be looking at? Below we take a look at what peer-to-peer lending is and discuss its advantages and disadvantages.
What is P2P lending?
Peer-to peer lending is a way for both individuals and businesses to raise finance. Its premise is very simple; it’s a way of borrowing money that completely removes the bank from the lending process. Investors, through an online lending platform lend money to businesses or individuals (their peers) and set their own terms and interest rates. So instead of borrowing money from a bank or similar institution, you’re borrowing money directly from an individual or a business.
Advantages of peer-to-peer business finance
- Unlike some sources of alternative finance, peer-to-peer loans are fast. From initially logging onto the relevant online platform, registering and applying for your loan, funds can be within your business account within a week. This compares well with traditional bank loans and especially crowdfunding which can take weeks or even months to raise the required funds.
- There is no doubt that P2P finance is flexible and you can usually arrange loan terms lasting from just a few month to several years.
- Peer-to-peer lenders can be empathetic to SMEs. The community of lenders will almost certainly have many individuals and businesses who have found themselves in the same position as you.
Disadvantages of peer-to-peer business loans
- If your credit isn’t the best, then peer-to-peer lending probably isn’t going to be the solution that you dreamed of. It can still be difficult for businesses with poor credit scores to access finance in this way and even if they do, interest rates, fees and charges can often be high.
- You may think that because peer-to-peer lending cuts the bank out of the equation, interest rates should be more competitive. This isn’t always the case. Many businesses assume that peer-to-peer lending is the cheapest way to raise finance and don’t do their due diligence and look at other sources of finances such as invoice factoring and discounting. In some circumstances these can provide better value and should be considered alongside other sources of finance.
- Even on loans that provide the borrower with a more attractive rate of interest than other potential sources of lending, borrowers can end up paying more due to high upfront fees and other charges.
- Because P2P lending is done on an online platform, it means that you don’t have access to someone to talk to about your loan and ensure you are getting the best deal. Lending from a traditional bank or using an invoice factoring broker for example lets you discuss with someone the various options available to you and ask any pertinent questions. With online peer-to-peer lending it can be very easy for an SME to sign up for a loan that on the face of it is an excellent deal but on further investigation may not be the best option and could even be an expensive mistake.
If your business is looking to raise finance then you may be overwhelmed with the options available to you. If you’d like some help, don’t hesitate to get in touch for a free, friendly and informal chat. Call us now on 01827 707680.