The emergence of peer to peer lending and crowdfunding has become a different era of funding projects. P2p lending has already become mainstream over the past few years. It offers several benefits to the borrowers compared to traditional lending methods. In this article, we are going to describe the benefits of p2p lending for startups and how it can help your business. But before getting into the details of benefits, let’s have a look at p2p lending and how it is different from crowdfunding.
What Is Peer To Peer Lending?
P2p lending is a new way to get money directly from the lenders without involving any bank or traditional institution. Instead, the process of Bridging Loan takes place on a p2p lending marketplace or platforms where borrowers sign up and list their requirements. Investors can look at all the loan applications and select which loan they want to invest their money in.
Typically, p2p platforms offer personal loans such as for home renovation, car repair, debt settlement, or to pay unexpected medical or utility bills. However, small and medium-sized businesses can also take a loan from p2p platforms if a startup needs extra funding for purchasing assets, research and development, stock purchase, acquisition and expansion. Usually, this loan ranges between £25,000 to £75,000, but some lenders also offer large amounts.
Since the p2p lending industry is relatively new, investing in it can include less stability and the risk of losing money if a borrower defaults. Moreover, most loans are unsecured, so there is no guarantee of profit.
How Is P2p Lending Different From Crowdfunding?
The main concept here is that p2p lending is considered a special crowdfunding case, while the main difference is due to funding type. Crowdfunding is equity-based investment such as equity in real estate. On the other hand, p2p lending is a debt-based investment in which borrowers repay the loan amount along with interest in different installments over a set period.
There are a number of p2p platforms in the UK, so whenever you want to invest or take a loan from p2p platforms, you must shop around and make price comparisons to find the right platform for you.
Now let’s talk about the advantages and disadvantages of peer to peer lending for startups.
Pros Of P2p Lending For startups
Here are the benefits of p2p lending that can help you in understanding how it can help your business.
Streamlined Application Process
The simple application process makes p2p lending different from traditional bank loans. P2p platforms provide direct interaction of lenders and borrowers. You can choose a platform, sign up as a borrower and provide necessary information to make your application more attractive and clear for lenders. You can also check interest rates directly on the platforms to get an idea of how much you have to repay.
P2p platforms usually perform all the necessary checks on your application quickly and make it available for investment within the shortest possible time. Most p2p platforms ask you to provide the following:
- The amount you want to borrow
- For how long do you want to borrow
- Personal information
- Credit score
- Income range
- Purpose of loan
If you want to borrow money for your startup business, you may have to provide details of your business finances such as profit and loss statements, balance sheets and tax returns. Lenders may also consider your time in business, profit and revenue.
Although funding time depends on the platform you choose, it is highly possible to get funds within 1 to 2 weeks. It is unlike bank loans that take a number of weeks to complete. P2p platforms have a large number of lenders, and as the investment amount can be as little as £10, the number of investors who could participate is significant. It is a key reason that most p2p loans get funded within hours.
Many leading p2p platforms display vital information about lenders and answer any questions before they are asked. As a result, you can get information about p2p loans and lenders, which help you in choosing the right loan.
Better Interest Rate
The interest rate of loans may vary from platform to platform. However, here are some ways to determine interest rate
- The borrowers can decide the interest rate they afford to pay, and then the investors decide whether they want to fund projects with that interest rate or not. No doubt, investors are always attracted to the high-interest rate.
- P2p platforms set the interest rate according to the borrower’s profile, and it depends on the borrower’s credit score, loan period, loan amount, and the income of the borrowers.
- The interest rate can also go up or down depending on the current supply and demand.
Again if we compare the interest rates of p2p loans with that of traditional bank loans, it is significantly low and makes borrowers happy. Most p2p platforms display the interest rates on the website.
It is an advantage for p2p borrowers but a disadvantage for the investors. Peer to peer platforms offer loans both secured and unsecured loans, but not all investors are likely to invest their money in such loans and risk their capital. However, unsecured loans offer a huge benefit to borrowers, and they can take a loan without using any of their valuable assets as collateral. However, platforms take into account your credit score and the cash flow of your business to ensure that you can afford to repay the loan.
These are the benefits of peer to peer loans for startups and small businesses. If you are looking for a loan for your startup business, you can apply easily through online p2p platforms and get quick funds.
Cons Of P2p Lending For startups
Like all other financial products, p2p loans also have some disadvantages that you must keep in mind. Alternative lending is growing faster, but it may not have enough regulation in many countries. In the UK, the financial conduct authority regulates p2p platforms to offer a transparent service to the borrowers. Moreover, all the processes take place online, so there is less personal communication between investors and borrowers. Another disadvantage for small businesses is getting a small loan amount. You should also keep in mind that the lower your credit score, the higher your interest rate.
Peer to peer lending for startups is a great alternative to traditional bank loans. You can get online loans without the hassle of lengthy paperwork and get funds transferred within a short amount of time. Disadvantages usually focus on the eligibility of businesses if the credit score is lower, the interest rate will be high, and you may also have to pay charges due to missed or late repayment, and it will also impact your credit score.
We hope that now you know the advantages and disadvantages of p2p loans for startups and small businesses, and you can make a better decision on whether you should take such a loan or not.