Why Peer-to-Peer Lending is becoming a Popular Choice for Small Business Loans

Peer-to-peer lending in the UK is becoming popular for funding small businesses due to the fact that because of the current economic climate, banks are reluctant to hand out loans and are turning many small businesses away. As a result, peer-to-peer lending is becoming the ‘go to’ option for startup businesses and for smaller, independent businesses.

What is a Peer-to-Peer Lending?

Peer-to-peer lending is when investors go to an independent company, a middleman, who allows lenders and business owners to find each other. A person/company looking for a loan will go this independent company with their credit score, the amount they want to borrow and then the risk will be calculated to determine how they are grouped. The investor will then be able to choose an individual / company to invest their money into and can use the grouping as a guide to the risk and potential return on investment.

How is it becoming so popular?

Peer-to-peer lending is becoming popular because it can be processed completely online which allows for quick and easy transactions. Many peer-to-peer loans are issued within seven days, vital for many small businesses requiring funds quickly.

Peer to peer lending is currently not regulated allowing for loans to be more easily given out to those perhaps with less than favorable credit scores. This however does give issues for investors with the money they are investing not being secured or guaranteed meaning if a venture goes wrong and the money gets lost, currently there’s little means to get it back. This will all change in April 2014 when the Financial Conduct Authority will regulate the industry. For small businesses, the risks are minimal and provide a great alternative funding option to banks.

Another reason why peer to peer loans are popular is the websites that put investors and businesses together also offer better interest rates than banks, which is obviously much more appealing for investors.

Analysts have predicted that the peer-to-peer lending schemes in the UK will keep on growing. The P2P Money website estimates £300 million in new loans will be arranged through peer-to-peer lending (all peer-to-peer and peer-to-business companies that are open to all UK lenders) in 2013, and this is growing at around 120% pa.

Peer-to-Peer Growth

In the last three years, peer-to-peer lending has trebled in size and if it continues to grow at this rate, then by 2016 it will be at an estimated £1bn worth. There are three companies that dominate 92% of the market; they are Zopa, RateSetter, and funding Circle. There are also small regional peer to peer lending companies flourishing such as Folk2Folk who are lending on average £1 million per month including funding renewable energy projects in the South West.  Folk2Folk differ from other peer-to-peer lenders in that they offer both high street premises and a web platform where lenders and borrowers are introduced and all loans are secured by first mortgages over property.

There is only one way that peer-to-peer lending is going and that is up. A survey of 4,500 Which? subscribers in April 2013 found that 9% of savers had used a peer-to-peer lending website and put their main reason down to the poor returns on offer from banks generally.

Andy Haldane, Executive Director of Financial Stability at the Bank of England recently was quoted saying “Peer-to-peer lenders … could in time replace high street banks”.