Peer to peer lending is a simple transaction between an individual that wants to lend money and an individual or business that wants to borrow money without the use of a third party facilitator, like a bank or a lending company, to manage the loan. It started in the USA in 2006 with Prosper.
Peer to peer lending is becoming more popular as banks limit lending and consumers find themselves facing difficulty obtaining traditional financing. Banks, trying to fix their balance sheets, have introduced much more stringent requirements for personal loans than what was required in the past and fewer people have the qualifications to obtain these loans. Small business owners have been hurt by the contraction in lending as well. The reduction in traditional lending to small businesses has resulted in a dramatic increase in the number of business owners interested in obtaining peer to peer loans.
Sounds brilliant but the problem has been that the potential borrowers turn to P2P after they have failed to borrow from other sources and this can make the borrowers high risk.
If this issue could be over come and P2P could become mainstream, I think it could become very popular, the lenders get a good return and the borrowers get a fair interest rate and terms. Even one is a winner.
To see how it works in practice take a look at http://www.fundingcircle.com/
Also here is blog http://stevegrice.wordpress.com/2012/01/30/peer-to-peer-business-lending-in-the-uk/ which is very interesting.
It would be great to find out your views and comments.
5 thoughts on “P2P – Peer to Peer Lending – is it the solution for lenders and borrowers?”
Thanks for the blog link Steve.
I think P2P will be the big thing over the next few years. Whether or not it serves a more risky borrower though is highly debateable – all of the banks are very risk averse at the moment and are turning down lots of proposals that actually stack up. I agree that it will be a problem for P2P if lots of businesses start defaulting (and we have seen this in the personal space), but with fairly rigorous pre-lending checks, the quality should be kept high. I am one of the sponsors for Thincats, and we reject far more proposals at initial due diligence stage than we take forward to the website.
The position of the Banks is well documented and this does create an oportunity for new lenders. P2P seems well placed to exploit the opportunity but the critical issue is getting the underwriting right. Too harsh and they become another Bank, too soft and they will quickly lose appeal for investors through bad debt. Only time will tell whether they get it right but in the meantime as a financial intermediary I would like to draw people’s attention to the fact that their are usually funding options available away from the High Street Banks and it does not have to be P2P. I would suggest businesses talk with their professional advisers, their Accountant, Broker or consultant. Then, maybe P2P can be one of several options to look at and assess as to suitability.
The Banks have vast data resources assisting them with their decision making and it sounds so easy to lend, which it is. The issue is obtaining repayment. Good opportunities for the cash rich where repayment can be spread if things go wrong. How many small businesses have been set up on family (parents) funds and then not repaid?
The main problem with obtaining Bank loans is that the application is very weak due to lack of the business owner having good management information. As Stewart says business owners should speak first with their advisers to obtain help in putting a loan request together then present to the Bank.
Hi, Steve. I also posted on LinkedIn. This is something I’ve been struggling with, too. I wonder if there are repayment options that might not involve money, but some other commodity or benchmark? Just wondering and curious to know what you think?
It is an alternative with little restraints and that is definitelt the solution for the entrepreneur.