Peer-to-peer lending

By David Griffiths, managing director, Sterling Capital Reserve

As an alternative to bank borrowing, peer to peer lending (often referred to as crowd funding) is now a viable alternative in the UK.

Lack of bank lending, low interest rates on deposits and the technology of computerised internet ‘platforms’ have combined to allow investors to lend directly to businesses.

Sterling Capital Reserve, a well-established Commercial and Corporate Finance Brokerage actively promotes this method of lending to its clients, either as a full solution, or blending it with traditional finance to achieve a clients requirements.

As with all lending – there are pros and cons.

Pros

Quick Application Process
Traditional loans often require extensive amounts of paperwork to be completed, various meetings with bank managers, followed by days or weeks before a decision to be made. With peer-to-peer loans, the timeline from application to receipt of funds can be less than a couple of weeks.

Flexibility
Peer-to-peer lenders are more sympathetic than banks and often relate to the ‘human’ element of running a business, after all many of the lenders are in business themselves.

Fixed Repayments
Interest rates are fixed for the duration of the loan so there is no exposure to future rate rises, unlike bank lending.

Security
Whilst banks take a ‘belt and braces’ approach to security for loans, peer to peer lenders will often take a view as to what security is available. In some cases peer to peer loans can be made on the back of an unsupported directors personal guarantee, without taking any security over the business. In such cases these loans can be taken alongside the bank.

Exit Fees
In most cases there are no penalties for early repayment, therefore the peer to peer funding can be used as a ‘stop gap’ until a better deal from a bank can be obtained.

Cons

Shorter Repayment Periods
Peer-to-peer lending often involves shorter repayment periods, typically 3 to 5 years. This is driven by the fact that investors are locking their funds up at a fixed rate of interest. As interest rates are only going to go up in the long term, there is more appetite for shorter periods. Therefore this type of lending tends to be unsuitable for property loans.

High Interest Rates
We are currently seeing peer to peer interest rates settling between 9% and 13%. Supply and demand drives the rate, so the better the proposition, the better the rate.

Conclusion
Peer-to-peer lending can be a practical alternative to businesses who can’t obtain funding from banks.

Using a specialist broker such as Sterling Capital Reserve, gives businesses access to a number of peer to peer lending platforms that are not available direct.