Q&A with ABF on peer-to-peer lending
What’s the idea behind peer-to-peer lending?
It’s simple. Every peer-to-peer (P2P) website wants to match those who want to borrow money with people who want to lend, just like the ABF portal. The big difference between P2P and traditional lending/borrowing is that there’s no bank or financial institution involved. It’s a direct relationship between parties – no trip to the bank needed.
I was going to ask – why shouldn’t I just put on a suit and go see my bank manager?
Because increasingly banks are becoming resistant to offering loans to individuals and small businesses. Alternative business funding routes like peer-to-peer lending put borrowers directly in touch with lenders. As they only exist on the web, they don’t have the same infrastructure costs as banks, like branches and lots of customer-facing staff, meaning they can offer faster decisions and attractive rates to lenders.
So what are the advantages of P2P lending?
If you’re looking for funding to grow your business then P2P lending tends to be quicker and easier than borrowing from a bank. For one it reduces the red tape. If your loan application is approved you’ll most likely be able to access your finance within weeks. Bank loans may take months. Another advantage is that most lenders let you pay back the loan earlier than expected with no penalty fees.
And the downside of peer-to-peer lending? What are the risks?
You will need to put down a personal guarantee against the funds you want to borrow. A personal guarantee can mean that your assets, including personal assets, can be put at risk if you don’t keep up repayments on your finance. Also, while you will probably be able to get an answer on a loan more quickly, you may pay slightly higher interest rates than a bank might charge.
However, P2P lending has grown very quickly and is now afforded much of the same protections as more traditional forms of lending. In practical terms this means a code of conduct that lenders abide by – honesty and transparency. All legitimate P2P lenders are regulated by the Financial Conduct Authority, meaning better rights for all involved and no worrying grey areas. It’s now a mature part of the finance industry and borrowers and lenders alike can do business safe in the knowledge that should something go wrong there is a formal route to investigate and reimburse. All lenders have to be open about risks and have a back-up plan in place in case something goes wrong.
How much can I borrow?
The amount you can borrow will vary from lender to lender but generally speaking you could borrow anywhere from £5,000 to £1 million for secured loans. Some lenders are prepared to offer up to £250,000 as an unsecured loan.
How do I get started? What button do I click?
Hold your horses. This isn’t a free for all. The people lending don’t give their money to just anyone. If you’re a small business wanting to borrow money from a P2P lender, you’ll have to submit financial records (such as accounts filed at Companies House, a business plan and bank statements) as well as details of any existing debt. Most funders will require you to submit an application form that will be assessed by its lending team and assigned a risk category. You should also explain what you plan to do with the money. These checks help P2P lenders manage the risk of lending to small businesses and are no more onerous than a bank application.
What if I’m a start-up – will I still be able to secure a loan?
If you’re a start-up, and possibly a non-limited company, you may be able take a loan based on the business owners’ own credit records, although the likelihood is you will also need to show at least two years of trading records.
How much is it going cost?
The interest you pay on loans will depend on your risk profile. Investors who are willing to lend you money will state how much money they are willing to commit and the interest rate. Once the interest rate from lenders is averaged out this rate is fixed across the duration of your loan – so you have peace of mind and a clear view on repayments. Finally, just be aware there could be a fee associated with arranging the loan.