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Are you thinking of getting a loan for your business but are concerned about interest charges or the possibility of being declined? If so, you’re not alone. Small businesses that account for 98% of registered businesses are looking for ways to secure funding to keep operations running or to expand the enterprise.
The usual course of action is to apply for a loan through a bank. However, the process can be tedious, the interest rate high, and the possibility of being declined is always there. An option you may want to consider is Peer-to-Peer lending or P2P. This is a business loan where you can borrow money directly from lenders without having to go through the usual route of applying at banks and other financial institutions.
P2P’s online platforms enable borrowers to directly connect to potential lenders. Peer-to-Peer lending has become an alternative source of funding for borrowers and income for investors.
How Do You Get A Loan From Peer-To-Peer Lending?
The process is straightforward. It all begins with an online loan application. The specialised lending platform will assess your application and determine the risk category. You will then receive a credit rating which will be the basis of your loan interest rate. Once your financial profile gets posted, you will receive offers from different lenders.
Some P2P platforms use a format that is similar to an auction where lenders and borrowers can bid for a specific rate of interest, while some are automated with fixed rates. If the process runs smoothly, you will be able to raise your target loan amount and the funds will be transferred to your account. Monthly payments will be coursed through the platform.
The Difference Between Peer-To-Peer Lending And Crowdfunding
P2P lending is often mistaken as crowdfunding. P2P is a loan that a borrower repays with interest.On the other hand, crowdfunding offers equity stakes to investors.
What Are Unsecured Peer-To-Peer Loans?
Most of the Peer-to-peer lending platforms offer unsecured business loans. If you wish to get one, keep in mind that your business profile which includes information on business plans, financial statements, business turnover, and profits will be reviewed thoroughly.
The loan interest rate will be higher because of your risk category. Although Peer-to-peer lending offers better rates than banks and other private lending institutions, the most advantageous rates can only be acquired by businesses in good standing.
Pros And Cons Of Peer-To-Peer Lending
Like other loan programs, Peer-to-Peer lending has its set of pros and cons. Take the time to read what the pros and cons are and determine if the advantages of P2P will suit the needs of your business.
Pros
- Offers higher returns to investors
- Offers lower interest rates to borrowers
- The platform is more accessible to borrowers
- The loan application process is fast
Cons
- Investors’ risk exposure is high. Many applicants have low credit ratings and been turned down by banks due to poor credit history.
- No insurance or government protection. In the event of default, the investor won’t be able to get his money back because his investment is not covered by insurance.
- Favorable interest rates are only given to businesses that are performing well.
Before deciding on applying for a P2P loan or any type of lending program for the matter, review your financials and if possible, seek the consultation of an experienced financial analyst.
What To Consider When Comparing Peer To Peer Loans
Comparing peer-to-peer (P2P) loans in the UK involves evaluating various factors to find the best option that suits your needs, whether you’re looking to borrow money or invest. Here’s a guide on how to compare P2P loans:
1. Interest Rates
- For Borrowers: Look for the lowest possible interest rate to reduce the cost of borrowing.
- For Investors: Higher interest rates might offer higher returns, but they also come with higher risk.
2. Loan Terms
- Duration: Loan terms can vary; some might be as short as one year, while others can extend over several years. Choose a term that aligns with your financial goals.
- Repayment Flexibility: Some platforms offer more flexibility in terms of early repayments without penalties.
3. Fees
- Platform Fees: Check for any fees charged by the P2P platform, such as transaction fees, servicing fees, or penalties for early repayment.
- Hidden Fees: Be wary of any hidden fees that could affect the overall cost of the loan or investment.
4. Risk and Security
- For Borrowers: Ensure the platform is regulated by the Financial Conduct Authority (FCA) for added security and compliance.
- For Investors: Understand the risk involved, including the platform’s default rate and what measures are in place to recover funds in case of borrower default.
5. Platform Reputation and Reviews
- Research the platform’s history, customer reviews, and any press coverage to gauge its reliability and customer service quality.
6. Features and Support
- For Borrowers: Some platforms offer support services, financial advice, or flexible payment options.
- For Investors: Look for features like auto-invest options, secondary markets for selling your loans, and diversification tools to spread risk.
7. Regulation and Protection
- Ensure the platform is authorized and regulated by the Financial Conduct Authority (FCA).
- Check if there’s a Financial Services Compensation Scheme (FSCS) protection or what safeguards are in place to protect your money.
Tools and Resources
- Comparison Websites: Use reputable financial comparison websites to compare different P2P lending platforms based on rates, terms, and reviews.
- Financial Advisers: Consider consulting with a financial adviser for personalized advice based on your financial situation.
Steps to Take
- Identify Your Goals: Whether you’re investing or borrowing, know what you’re looking to achieve.
- Research: Use the factors above to research and compare different P2P lending platforms.
- Read the Fine Print: Before committing, read all terms and conditions carefully.
- Diversify: If you’re investing, consider spreading your investment across different loans and platforms to mitigate risk.
Remember, while P2P lending can offer competitive rates and unique opportunities compared to traditional banking, it also carries its own set of risks and considerations.
It’s important to do thorough research and consider your own financial situation and tolerance for risk before engaging with a P2P lending platform.