Sometimes referred to as crowd lending, peer to peer lending offers businesses the opportunity to borrow money from a ‘crowd’ of people (investors) rather than an institution.
It works by offering people a platform where they can lend their money to businesses (and also individuals, but we will deal with business peer to peer lending here) in return for competitive interest rates.
The platforms source, credit-check the potential borrower, facilitate the loan and automate (as much as possible) the process of lending and borrowing (inclusive of the legal and regulatory requirements) and take a fee or commission for doing so.
Of course this is what the banks have always done with savers’ money; there is nothing new about the process. What is new is the technology that facilitates this and keeps overheads down for the peer to peer lending platforms. This in turn means that the platforms can generally offer more attractive interest rates to investors and attractive repayment rates to businesses taking the loan.
However, in all other respects peer to peer business lending is the same as borrowing money from a bank. There are credit checks, businesses need to have their financials to hand and prove that they are able to meet repayments. Loans can be secured against property of the business or the individual, or unsecured. Whilst the process can be faster than with the banks, that isn’t necessarily the case; businesses that submit insufficient information or take time to handover all of the information that the platform requires will be subject to the same to-and-fro that they would have received from the banks. What is true is that peer to peer lending platforms will often lend to businesses that the banks won’t and that several specialist banks and loan providers have now stepped in to the business peer to peer space; in this way the ‘crowd’ now also includes institutions.
How peer to peer lending developed
Zopa was the first peer to peer lending platform to launch in the UK, offering loans to individuals. Funding Circle launched in 2010, specialising in peer to peer loans for businesses. The sector grew quickly from there and by the end of 2015 the crowd of lenders on peer to peer platforms in the UK had lent more than £4.4 billion.
The UK government were strong supporters of peer to peer lending to businesses. It saw the sector as offering much-needed support to small businesses that were either overlooked, or deemed too risky, by the banks. In 2014 the government injected £20 million into small businesses via peer to peer platforms. It also created the Innovative Finance ISA (or IFISA), which enabled investors lending money through peer to peer sites the opportunity to do so in an attractive tax saving wrapper, boosting any returns that they made within the wrapper by removing the tax that they had to pay on them.
While the government supported the sector others were, and some remain, less enthusiastic. Concerns that individuals may not understand that small businesses are at a higher risk of loan default than larger businesses, that capital adequacy requirements (having enough money to hand to pay out if things go wrong) for the peer to peer platforms was too low and that government support meant the peer to peer platforms had an unfair competitive advantage over the banks.
However, while peer to peer has grown fast it is worth noting that it still offers a fraction of the business loans facilitated by banks and in 2015 NESTA reported that the average loan size for non-real estate businesses via platforms was £76,280 funded by an average of 347 lenders.
In March 2017 the FCA noted that there were more than 100 applications for new P2P platforms outstanding. This is the sign of a booming sector, but it also suggests that the market could become over saturated and when that happens there are usually casualties, then consolidation and finally clear winners – just as there are in all new young, maturing sectors.
Who offers P2P loans?
When peer to peer lending started there were a handful of platforms in the UK that connected individuals with money to lend with businesses, or other individuals, who needed a loan. The better known platforms include Funding Circle, Ratesetter and Zopa. However in the last two years P2P has expanded. Challenger banks like Metro Bank, specialist banks like Close Brothers and specialist loan brokers are offering loans through the peer to peer platforms or using their technology to connect with a wider potential client base than before, particularly in the business loans sector. This is why some observers now refer to peer to peer as debt crowdfunding.
Who are the key players in peer to peer business loans?
The biggest peer to peer platform that only lends to businesses and can offer loans of up to £1 million. Funding Circle offer both secure and unsecured loans and have a large ‘crowd’ of investors as well as money from the Government owned British Business bank.
This platform offers both business and personal loans, with business loans of up to £2 million. Like Funding Circle Ratesetter offers secured and unsecured loans. Apart from being the second largest peer to peer lending platform in the business space Ratesetter’s key sales pitch is that it does not penalise early loan repayments.
This platform offers businesses five loan options; donation, loan, revenue, bonds or equity and recommend that there are different profiles for each option (eg donation is suitable for not for profit, loan for more established businesses, revenue for less established businesses). Loans of £10,000 to £1 million, terms of 1-5 years.
FundingKnight: say that they have the experience to ‘navigate complex situations’, meaning they’re a good option for businesses that might be turned down by platforms with strict lending criteria and less flexibility. Loans from £250,000.
Lendy: formerly known as saving stream, but merged with lendy in March 2017. Lendy specialise in bridging and development loans and for that reason are of particular interest to the real estate sector. Relatively new to peer to peer, the platform is making a splash with bridging loans from 0.65 per cent per month and development loans from 1 per cent per month it is easy to see why.
Offers loans of £25,000 to up to £5 million for terms of between three months and five years. The loans on offer are interest only and the full capital sum must be repaid at the end of the term. All loans must be secured against either a business or personal asset(s).
Unsecured loans of £50,000 to £250,000 for three to 12 months with no early repayment fees. Secured loans for longer periods and for up to £5 million also offered. However, for a longer term secured loan Yes Money needs to see three years accounts and your business must have an annual turnover of £3 million.
It is also worth being aware of platforms like Crowdstacker and Wellesley, which offer bonds or funds to investors that in turn offer loans to businesses. Wellesley had a peer to peer platform but at the time of publishing this guide it was being redeveloped.
Alternatively you can visit www.businessagent.com and have access to more than 70 specialist P2P platforms and small business lenders with one application.
What are the industry regulations?
Peer to peer lending has only been subject to UK regulation by the Financial Conduct Authority (FCA) since 2014 and for business lending the focus is on how the platforms market to investors. At the end of May the FCA quietly recognised the sector as its own distinct entity, different to asset management and bank lending.
Peer to peer platforms must present information clearly, be honest about the risks of investing and have plans in place should things go wrong. Since April 2017 the peer to peer platforms must have at least £50,000 of capital in reserve to act as a buffer to ensure that they can withstand financial shocks or difficulty.
Defaults may be low to date, but there is a general expectation that they will increase over time and regulatory scrutiny on investor protection should the worst occur means that many of the platforms require secured loans.
What do you need to do to apply?
Interest rates, the time periods over which you can take out a loan (the terms), the minimum and maximum size of the loans on offer and whether the platform offers secured and/or unsecured loans differs from platform to platform, so it is worth doing some research before applying to make sure that you are applying for the right type of loan for your business. Every credit check that is undertaken will have an impact on your businesses credit rating, so utilising tools like the businessagent.com credit rating check, which is designed to have a ‘soft footprint’ (no negative impact) on your credit rating, is also worthwhile.
The speed of loan application is made a good deal of by the platforms, but the reality is that just like applying for a Bank loan you need to have all the right materials to hand if you would like a swift decision.
Most of the platforms have an online loan application form. The initial application process is a registration of interest and will take less than ten minutes. Generally there is an initial offer which if accepted then requires further application. Platforms will expect at least six months of accounts (although some platforms ask for more) and it is useful to also have your business plan and a list of your assets and liabilities as these are likely to be requested.
Just like the banks peer to peer lending platforms have their own lending criteria and ‘loan books’ (ie risk profiles that they are willing to take on), some of which are stricter than others. It is important that when applying you are open about any CCJs or other issues that may impact your personal and business credit rating, with reasons why they happened; being upfront will help rather than hinder you.
Once the full application process is complete a formal loan offer is usually made within a few days and if accepted the money can be with your business in as little as 24 hours.
This article was provided by BusinessAgent.com.