{"id":156225,"date":"2023-10-24T07:00:20","date_gmt":"2023-10-24T06:00:20","guid":{"rendered":"https:\/\/startups.co.uk\/?p=156225"},"modified":"2023-10-24T08:17:00","modified_gmt":"2023-10-24T08:17:00","slug":"peer-to-peer-lending","status":"publish","type":"post","link":"https:\/\/startups.co.uk\/funding\/peer-to-peer-lending\/","title":{"rendered":"P2P lending: what is it and should startups use it?"},"content":{"rendered":"

[vc_row][vc_column][vc_column_text]Peer-to-peer or P2P lending allows startups to obtain loans directly from individual investors, cutting out financial institutions. It connects companies looking for funding<\/a> with lenders who want to invest<\/a>.<\/span><\/p>\n

P2P lending sources increased following the 2008 financial crisis when traditional lenders introduced stricter lending criteria. <\/span><\/p>\n

Most P2P lending takes place through online platforms. The platform provides a place for lenders to decide who to lend to and loanees to pitch investment opportunities to potential investors.<\/span><\/p>\n

P2P lending is sometimes called social lending or crowd funding. All UK P2P lenders are regulated by the Financial Conduct Authority (FCA).<\/span><\/p>\n

How is it used and by who?<\/h2>\n

Zopa was the first UK P2P lender, set up in 2005. There are dozens of others, including Funding Circle, LendInvest and Kufflink. The P2P lending environment fluctuates as some lenders shut and others start operating. <\/span><\/p>\n

P2P lending platforms act as administrators between lenders and borrowers. Lenders can get a higher rate in return for taking on more risk, because P2P loans don’t qualify for savings guarantees. Borrowers can access funding if they have been rejected for loans from alternative sources or at a potentially lower rate than from traditional lenders<\/a>.<\/span><\/p>\n

If a startup’s loan application has been rejected, it does not necessarily mean they are risky to invest in. There are many reasons why traditional financial providers reject loan applications from new businesses. Also, reputable P2P lending platforms only accept lending requests from reliable sources.<\/span><\/p>\n

Equity crowdfunding platforms like Crowdcube and Seedrs are not P2P lending platforms but can be a good option for startups looking for investment.<\/span><\/p>\n

How does it work?<\/h2>\n

P2P lending platforms set rates and terms for lending and borrowing. They charge both lenders and borrowers fees, not commission. Investors open an account and deposit funds. The organisation wanting a loan is credit checked by the platform, its financial history is analysed to establish a credit rating and it is then assigned a risk category that dictates the interest rate offered to lenders. Their business and borrowing requirements are reviewed to set a funding target.<\/span><\/p>\n

Lenders can select from higher or lower risk lending options. They can choose the loan term and the return they are after. The rate of return is potentially higher for riskier loans and lower for low-risk investments. Most lenders split investments over many loans. Diversification is always a good investment strategy and with P2P lending it reduces the risk if one loan is not repaid. <\/span><\/p>\n

Loan applicants review offers and select one or more loans from several, even dozens of investors. Funds transfers are handled by the platforms. Borrowers repay capital and interest to lenders through the platform. Borrowers set a funding target and the lending process ends when it is met. Not all borrowers meet their target.<\/span><\/p>\n

What are the advantages?<\/h2>\n

P2P is a flexible, transparent lending alternative to traditional providers like high street banks.<\/span><\/p>\n