P2P lending - what is it and how can it help my business?

Peer-to-peer (P2P) lending is an increasingly important new concept in business finance, with the potential to significantly alter the way in which ventures are funded.

P2P lending sees businesses dealing with individuals, rather than banks. As the global credit crisis took hold, many firms’ ability to borrow from conventional lending institutions was significantly reduced. P2P lending grew in popularity during this period, and is now beginning to mature into a genuine alternative to bank finance.

What is P2P lending?

P2P lending is a potentially revolutionary new way of finding finance for your business. In basic terms, P2P lending sees individuals lending money directly to businesses, without the need for an intermediary like a bank.

P2P lending was pioneered in the UK by a company called Zopa. The service provided lenders with an easy way of making a return on their cash, and borrowers with a simple way to apply for finance at relatively attractive rates.

While Zopa was aimed primarily at individuals, a number of similar services have sprung up offering P2P lending direct to businesses.

How does it work?

There is a range of P2P ‘marketplaces’ offering business lending services. Almost all P2P lending is conducted through one of these organisations, which are generally based online.

Depending on the nature of the arrangement, the cash that makes up your P2P loan might come from one or several sources. Many lenders only want to risk a few hundred pounds, and these sums are often bundled up with others to form a whole loan.

Just like any other loan, the interest rate you pay will generally depend on your credit rating. Once the loan has been negotiated you will make regular repayments, generally through the intermediary organisation.

How can it help my business?

Businesses across the country continue to suffer from a paucity of credit. Conventional financial institutions are simply not doing the work that is required to support British businesses. Indeed, a survey released just this week suggested that one in three UK SMEs cannot secure credit from their bank.

Without easily accessible credit, businesses cannot grow. The corollary of this is that the continued recovery of the British economy is dependent, in great part, on the banks’ willingness to lend. Seldom before has the availability of finance been such an important issue.

You will already know how vital credit is for your business. Many firms simply cannot survive without a suitable credit line. P2P lending provides a vital alternative to bank financing, and can help you to secure the cash that you need.

What’s wrong with conventional bank lending?

The first problem is obvious: it is just too hard to come by. The British Bankers Association claims that upwards of 80 per cent of all SME credit applications are now approved – but that simply does not tally with the stories being told by business owners.

The apparent lack of bank loans has meant that many business owners have turned to expensive overdrafts or, even worse, personal credit cards, in an effort to fund their businesses. Credit of this sort can be financially crippling, and P2P lending provides a vital alternative.

What are the drawbacks?

First of all, it is important to remember that a P2P loan is still just that – a loan. If you fail to keep up repayments, your credit rating will suffer. Similarly, although many lenders engaging in P2P may be more understanding than some banks, that patience will only stretch so far. It is therefore vitally important that you stick to the terms of your loan.

Another potential drawback is the size of the loans on offer. Although the scale of the loans available is growing, it is common to find limits on the amounts on offer. These limits are generally significantly lower than those imposed by banks, so if you need to borrow a large amount P2P lending may not be for you.

Peer-to-peer lending is still in its infancy. But for an increasing number of businesses it presents a much-needed alternative to conventional sources of finance. If you are struggling to persuade a bank to lend to you, or if you are simply sick of dealing with the traditional City behemoths, P2P finance might well be worth a look.