Peer to peer lending Q&A

Introduction

If you are looking for an alternative route to financing your business rather than turning to traditional lenders, peer to peer (P2P) lending is one of the choices open to you. It is based on direct transactions between investors and borrowers, unlike a bank which takes money from depositors on to its own balance sheet and lends it out.

P2P lending can be faster, more efficient and more flexible than banks when it comes to business finance. This has allowed it to become an increasingly popular option for raising capital.

As such, this article aims to help you with some of the trickier P2P questions with the help of two experts in the field. We speak 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 it 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. This 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 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 has also led a number of P2P 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 also 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 consecutive 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 P2P 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. Therefore, it is up to borrowers to seek out the most reputable P2P 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: 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, visit RateSetter and Altfi, or speak with the Growth Hub team.