David de Koning, Head of Communications for Funding Circle, explains what peer-to-peer business lending is.
Obtaining finance from a bank can often be a stressful experience for business owners and managers. It can be a slow and often time-consuming process which often involves multiple meetings with the bank manager, a potential lack of transparency about the costs involved, and can all too often end with a “no”, or worse, a review of existing facilities.
It’s no surprise then that many business owners are put off from applying for a loan altogether, which is not only frustrating for them but holds back the economy, which is reliant on small businesses for growth.
As a result of the credit crunch and banks’ reluctance to loan money, alternative finance has rocketed over the last three years, helping growing businesses to find fast, fair and transparent finance.
Peer-to-peer business lending is one of the most successful forms to emerge, where individuals and organisations can directly lend to small businesses via an online platform or marketplace. Investors can earn attractive returns whilst businesses can typically access finance within just two weeks.
To apply for a loan, businesses provide information about their finances, management structure, and staff employed. Crucially, no face-to-face meeting is required as everything happens online, making the process fast and efficient.
Businesses that meet the minimum requirements, usually related to number of years trading, turnover and credit rating, then have their application reviewed. The platform’s credit assessment team use many of the same processes as the high street banks, alongside their own proprietary risk models.
Successful businesses are given a “risk band”, which helps investors to choose which businesses to lend to.
Rates are set by investors themselves who bid to become part of the loan, and the borrower is offered the average rate from all bids once the loan has fully funded.
Investors can bid small amounts, from as little as £20, on lots of different businesses to spread their risk.
There is usually no early repayment fee, the fee structure is often simple and money can be borrowed quickly to suit seasonal demand.
By cutting down on the red tape and bureaucracy associated with traditional loans, businesses are able to access finance more quickly and at times to suit them, leaving investors, businesses and the economy with a win-win-win situation.
A report by Government think tank, Nesta, predicted that the UK’s peer-to-peer lending industry could be worth over £12 billion per year. A recent report by Foundation Capital predicts that the global industry will be worth $1 trillion by 2025. At Funding Circle, over £325 million has been lent to over 5,500 small business in the UK; £100 million of this was lent in the first six months of 2014 alone. In total, lending via Funding Circle has created an estimated 16,500 jobs across the country since launch in 2010.
Banks will always exist, in one form or another, but they are no longer the cure-all for every requirement a business now has. Increasingly business owners are becoming aware that there is now a genuine choice when it comes to looking for finance.