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 / Is peer-to-peer lending available for my business?

Is peer-to-peer lending available
for my business?

Peer-to-peer lending is a relatively new (since 2005) form of lending that is
growing in popularity. Digital platforms connect individuals who want to invest
their money directly with businesses who are looking for a loan. Investors can
generally pick which businesses they lend to, or they can use automated options
that spread their risk over many businesses.
Peer-to-peer lending offers lenders better rates of return than the banks and
traditional savings accounts (typically around 3 – 6% after provision for bad debt
and any fees are deducted). It can open opportunities up to businesses that in
many cases have been unsuccessful at getting traditional forms of finance i.e. bank
loans, at better rates than the banks typically offer. Although the risks are greater
for lenders, for many it is a socially appealing and financially intriguing form of
investment.

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What is invoice financing? Invoice factoring and invoice discounting

Generally speaking, most peer-to-peer lending platforms require a business to be able to demonstrate its profitability before being accepted onto the site.
The first stage is an online application form which the lending company should respond to within a couple of days. The criteria 
vary by platform but to pass this initial screening stage, usually,
your business would need to be a UK based SME, either a limited company, LLP or a sole trader.
Some platforms will require you to have a minimum of two years of accounts filed at companies house and a minimum annual turnover of, for example, £100,000. Each one is different though, so take some time to compare. Generally, however, you need to be able to demonstrate profitability and have up-to-date management accounts by which the platform can assess your credit risk.
If you pass this initial stage, your loan will be listed on the platform as an auction and investors will be invited to make bids. They will
bid on the amount they are prepared to lend, and at what interest rate – the higher the risk your business poses, the higher the
interest rates of the loan will be. Investors can bid anything from 
£20 to much more. Obtaining the full value of your loan may take a few hours or a few days, and you could end up with a small amount of investors, or hundreds. Once the bids begin to total more than your loan request, any bids entered at a higher interest rate will be knocked out by those at a lower interest rate, bringing your overall average interest rate down by the time the auction ends.
Once you have accepted the loan, the money should be in your account anywhere from 3 days to two weeks later.

Pros and cons of peer-to-peer lending

The biggest pro for you is likely to be that it is generally a much faster process than accessing bank loans for example. Online application usually takes around 30 minutes and if you are successful, the money can typically come through in a maximum of up to 2 weeks.
However, there have been reports of the process being slowed down by the banks, where for example, security for the loan is proposed against assets that are already acting as security for another loan. Where there is a proposed ‘second charge’ against an asset, it is common practice that the holder of the first charge should give permission for a second charge to be held against the asset, as the second may impact the borrower’s ability to meet the terms of the first. There have been reports of the banks taking months to agree to second charges, which slows the process down dramatically.
One of the intriguing aspects of this form of lending is that it brings borrowers and investors closer together, and allows investors to make their own decisions regarding who they lend to. Looking through various investor forums, the level of information that borrowers supply when applying for their loan is a critical factor. A lack of information is viewed with suspicion or caution. How you present your business and its needs will therefore play a significant role in whether you are able to access the loan and the rates you receive. Whilst the process is subject to formal credit checking procedures, it makes more room for the human dimensions of the decision-making process, which can make it very interesting. Investors are in many cases more likely to lend to people and companies they like and respond to on a personal level.

Which companies are offering peer-to-peer lending to businesses?

Funding Circle is the most well known P2P business lending platform.  It has been lending to small and medium-sized businesses since 2010.  It currently works with established businesses and not start-ups.

  • Loan range: £5k to £1m
  • Repayment terms: 6months up to a maximum of 5 years, paid monthly
  • Interest: fixed
  • Early repayment fee: none
  • Security: depends on the amount of the loan, some loans require personal guarantees, asset security, or security over all the assets of your business
  • Are unsecured loans available? Yes, typically up to £200k but they will require a personal guarantee
  • Other fees: completion fee of 1.5% – 6% of loan value when you accept your loan
  • Timescale: you should receive a decision in principle in 2 days

 

Ratesetter was launched in the UK in 2010.  It offers 2 types of loan for businesses: loans of up to £25k are treated as personal loans, so you are personally responsible for repayment.  Loans from £25k to £2m are business loans.  For loans over £25k, your business will need to be UK based, have at least 3 years trading history and be able to provide the last 2 years’ audited accounts.  The business loan terms are as follows:

  • Repayment terms: 1 to 5 years
  • Interest: fixed, depending on loan value
  • Early repayment fee: none
  • Security: both secured and unsecured options available, but depending on loan value will usually look to take a debentures over the company and/ or personal guarantees
  • Other fees: set-up fee of between 0.5% and 1% of loan value, administration fee of between 2.5% – 3.5% (as a margin over the rate paid to lenders), credit rate fee of between 1% and 4%
  • Timescale: agreement in principle within 2 days

 

 

Next steps

Whether this form of funding is available for your business will most likely depend on your business’s financial track record, and the case that you are able to make via the online platform. For companies with a good track record and a strong marketing team, it can be a very successful way of raising funds, with a nice PR aspect. However, for companies whose finances are more precarious, or smaller companies without a dedicated marketing team whose directors are especially time-short, it is unfortunately, unlikely to offer a viable source of funding.

How we can help with peer-to-peer lending

If you feel that this is an option that you would like to explore, we have strong relationships with most of the main peer-to-peer lenders in the UK corporate marketplace and will happily talk through your options with us. Contact us for more information.

Business Rescue Expert is part of Robson Scott Associates Limited, a limited company registered in England and Wales No. 05331812, a leading independent insolvency practice, specialising in business rescue advice. The company holds professional indemnity insurance and complies with the EU Services Directive. Christopher Horner (IP no 16150) is licenced by the Insolvency Practitioners Association

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