Peer to peer lenders are the matchmakers of the business world. They bring together scores of individual savers and investors and match them with businesses looking to borrow money.
Peer to peer business finance is conducted through an online platform that matches individual investors to the businesses in search of loans, so effectively cutting out the role of a bank or other lending institution.
Without a bank or any other middleman taking its commission on such transactions, investment in peer to peer business finance offers the potential for considerably higher rates of interest paid to investors or by borrowers. For borrowing businesses, one of the further principal attractions is the ease and speed with which it is typically possible to arrange the necessary business loan.
Although a relatively new form of lending, peer to peer platforms have gained considerable attraction and success.
How it works
Peer to peer lending works in slightly different ways depending on the particular online platform.
Some platforms, for example, allow investors to choose which businesses their money is lent to, whilst others make that decision on behalf of the investor, explains an article published by the Consumer Association’s Which? magazine in April 2018.
As a source of business finance, peer to peer lending offers borrowers streamlined, online access to funding in a straightforward, simple, and speedy way.
A business interested in borrowing this way makes an initial enquiry seeking a decision in principle. Typically, this involves seeking an initial decision in principle for borrowing the requested funds over a given repayment term. The decision in principle may be given practically immediately.
The next step is a formal application on the part of the borrower who describes the business and its current financial status. The online form containing that information typically takes little more than 10 minutes or so to complete – a far cry from the time likely to be taken in preparing the detailed business plan and cashflow projections demanded by a bank, for example.
At this stage of the formal application, a credit check is also made on the applicant business to ensure the affordability of the loan and the borrower’s credit worthiness. Indeed, some peer to peer lending platforms allow investors to choose the credit worthiness of a borrower – offering higher rates of interest on loans considered to carry greater risk.
Thanks to the streamlined processes adopted by peer to peer lending platforms, the formal application may be considered in as little as 24 to 48 hours. If approval is given – and accepted by the borrower – the funds may be transferred directly to the company’s bank account within a matter of days.
The future of peer to peer business finance
Since peer to peer business finance is still in its relative infancy, the rules governing its further development continue to be shaped by the regulator, the Financial Conduct Authority (FCA).
Some of the issues currently under consideration by the FCA are described in greater detail in a report by the Financial Times on the 6th of August 2018.