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Peer-to-peer lending: what you need to know

by: Laura McMullen
  • 03/03/2014
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Mortgage brokers are always looking to expand their income streams and peer-to-peer lending could be an option. Laura McMullen, business development director at Funding Circle, offers advisers a simple guide.

Obtaining finance from a bank can often be a stressful experience; a slow and often time-consuming process, with a lack of transparency about the costs involved. All of this often ends with a no, or worse, a review of existing facilities.

It’s no surprise that many business owners are put off from applying for a loan from their bank altogether, which is not only frustrating for them but no good whatsoever for the economy, which is reliant on small businesses for growth. However, it needn’t be like this.

Out of the ashes of the credit crunch has emerged a new way of helping successful, growing businesses find fast, fair and transparent finance. Peer-to-peer lending is one such model. It is an online marketplace which allows British people and organisations (such as the government and local councils) to bypass the banks and lend directly to small businesses.

Technology is at the heart of these platforms which are currently transforming the financial services landscape as we know it. Investors can earn high, stable rates for the long term whilst businesses typically get access to finance within two weeks, all of which helps the economy to grow.

The growth of non-bank finance has exploded in the last three years. By cutting out the red tape and bureaucracy associated with traditional bank loans, businesses are able to access finance more quickly and at times to suit them. A recent report by government think tank, Nesta, predicted that the peer-to-peer lending industry could be worth over £12bn per year. 

To apply for a loan on behalf of a business, brokers complete a short application form. Here they provide information about the business, including key financial details, management structure of the business and number of staff employed.

Crucially, no face to face meeting is required as everything happens online, making the process fast and efficient. Any business looking to borrow money must have a minimum turnover of £100,000 and have been trading for at least two years, as well as have a strong credit score.

Businesses that pass this initial application stage are then reviewed by the credit assessment team, who look at each loan individually. Funding Circle uses many of the same credit checks as the high street banks do. Successful businesses are given a ‘risk band’ from A+ to C-, which helps investors to choose which businesses to lend to.

Once businesses pass the credit assessment processes, their loan is posted on the marketplace. From here, investors choose which type of businesses to lend to, and bid the amount of money they wish to lend, and the interest rate they want to earn. Rates are set by investors themselves who bid to become part of the loan. Investors can bid small amounts, from as little as £20, on lots of different businesses to spread their risk.

Unlike banks, there is no early repayment fee, the fee structure is simple and money can be borrowed quickly to suit seasonal demand.

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 and introducers are becoming aware that there is genuine choice when it comes to looking for finance, and that they no longer need to have a relationship based on exclusivity with a bank.

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