There’s a lot of talk about Peer-to-Peer lending (P2P) in the media. Some herald it as the future of finance, while others accuse it of standing on the starting line of the next financial crisis.
Conflicting messages can confuse both the public and business community about online lending. Peer-to-Peer lending has grown in recent years, blooming from an underground financial product to a legitimate source of finance for small businesses.
The reality is that online lending comes in many different shapes and forms, including Peer-to-Peer lending, crowdfunding and unsecured business loans. The truth is that their approach to capital, credit assessment and risk all differ dramatically.
Let’s talk about Peer-to-Peer lending, one piece of the online lending puzzle.
What is Peer-to-Peer Lending?
Peer-to-Peer (P2P) lending companies connect investors with businesses or individuals that want to borrow money. By using technology to cut out traditional middlemen like banks and brokers, P2P lenders can reduce costs for borrowers and give investors a good return on their money. Heralded as a lending solution for growing businesses, P2P lenders can help SMEs that may struggle to get a loan from a traditional institution.
P2P business lending has accounted for 36 per cent of total online alternative finance market volume in the Asia Pacific region over the past three years, according to a report by KPMG and Cambridge.
What are the benefits of P2P lending?
Banks tightened their lending criteria in the wake of the 2007 financial crisis, making it harder for small businesses to access credit. A host of online lenders, including P2P lenders, stepped up to fill the void, providing an alternative to banks. In particular, a P2P loan is a good option for SMEs looking for smaller sums of credit.
By cutting out traditional institutions and bureaucratic red tape, P2P lenders are able to offer better rates to creditworthy businesses and individuals. P2P lenders also don’t tend to charge early repayment fees.
Accountants recommend that businesses start looking for finance 6 months before they need it. Loan applications through P2P and other online lenders tend to be much quicker than through a bank.
What are the drawbacks?
While P2P lenders are indeed bank loan alternatives, they still require a good credit history. SMEs without good credit scores may pay a higher interest rate than with a bank or have their application rejected.
Regulation of P2P lenders is constantly changing, with little uniformity around the world. Uncertain regulatory landscapes may limit your choice of platform and loan. (However, it’s important to note that in most markets, P2P lenders are regulated by a financial authority.)
P2P lenders range in their models. ‘Auction’ based lenders allow investors to bid on your loan, which can prolong the application process.
Peer-to-Peer lenders provide funding opportunities for businesses that need finance quickly and easily, or whose needs aren’t met by traditional financial institutions. While P2P lending is a developing industry that has its own teething problems, it represents a move towards making lending more democratic and accessible for small businesses.
Originally published February 2 2017 , updated February 3 2017