Peer to Peer Lending Q&A
You will learn
- What P2P is
- How peer lending is affected by Brexit
- The risk for borrowers using P2P
If you are tired of dealing with traditional lenders who operate at a snail’s pace, or do not understand your business model and needs, then it may be time to try one of the alternative finance options out there. Peer-to-peer (P2P) lending is just one of the choices you have; you might also want to consider crowdfunding. It is based on direct transactions between investors and borrowers, unlike a bank which actually takes depositors’ money on to its own balance sheet and lends it out. Peer-to-peer lending can be faster, more efficient and more flexible than banks when it comes to business finance.
Since it has become an increasingly popular option for raising capital, we thought it was time to get to grips with some of those tricky P2P questions and caught up with two experts in the field. We spoke to Paul Marston from RateSetter, one of the prominent P2P platforms, and Ryan Weeks from Altfi, the leading news site for the fast growing alternative finance space.
1. What are the effects of high inflation and Brexit on P2P and what does this mean for borrowers?
Paul: Macroeconomic developments such as an increase in inflation impact all types of borrowers. Along with creditworthiness, we also assess affordability when considering loan applications to check that borrowers can continue to repay their loan if their circumstances or economic conditions change. We have not seen an impact from Brexit on our business borrowers, but we are vigilant as it may have a negative effect on the trading environment, which could in turn impact their ability to repay, and equally could deter other businesses from seeking finance to expand and grow. We also closely monitor the impact of macroeconomic conditions on our borrowers.
Ryan: Peer-to-peer lenders have been overwhelmingly chipper in the wake of Brexit. The uncertainty it has created has caused a lot of banks to pull back from certain niches, which heightens demand for some specialist peer-to-peer platforms (in the bridging space, for example). The biggest small business lender in the P2P space Funding Circle has posted consecutive monthly origination records over the past few months, showing that demand for its services among borrowers is undiminished. The cutting of the base rate to the historic low of 0.25 per cent has led a number of peer-to-peer platforms to adjust their rates accordingly, in order to remain competitive in core markets, without having to compromise on credit quality. This lowers the interest rates available to investors, but results in a cheaper cost of funding for borrowers.
2. There is a lot of discussion on risks for lenders, are there any risks for borrowers?
Paul: We have intentionally designed our finance product so that it works really well for businesses – it is fast, flexible and simple. We proactively manage risk, such as only lending to UK-based businesses that have at least three years of trading history and we may also ask for security against the loan.
Ryan: The primary risks for borrowers are clarity and comprehension. Not all peer-to-peer lending and alternative finance products are straight forward. Some platforms offer bog-standard term-loans, with monthly repayments - others offer credit facilities, merchant cash advances, or selective invoice finance. In each case, it is important that businesses are aware of exactly what kind of facility they are taking on, how repayments work, and what will happen if they are unable to repay. Small business lending is not regulated, after all, in the way that consumer credit is - so it is up to borrowers to seek out the most reputable peer-to-peer lenders for themselves. Referral platforms - particularly those mandated by the bank referral scheme - can help here.
3. Finally, if someone is new to P2P – what general advice would you give them?
Paul: There are different models of peer-to-peer lending. As a potential investor, it is a good idea to do your research and ensure that you are comfortable with the risk and reward a P2P platform offers and how it operates – remember this is an investment, so returns can be healthy, but there is no guarantee of safety. As someone looking for a loan, you should shop around for the appropriate product for you, including checking that you meet the application criteria, that you understand the features of the loan product and can afford the repayments.
Ryan: Read AltFi! Ha. In all seriousness, the important thing is to ensure that you're comfortable with the risks (and indeed rewards) of what you're getting into. The platforms in this space live and die on the quality of their transparency and customer service, so take advantage of that. It's generally very easy to chat to the platforms over the phone, and if you're interested in investing, the biggest platforms allow you to go so far as to download their full loan book online. The crucial thing to understand as an investor is that these are investments, NOT savings products, and they are not protected by the FSCS.
For more information on RateSetter, head here.
For more information on Altfi, head here.