Peer to business lending: Funding the future
It’s not been a great summer for the financial big boys. As soon as one of them fixes the latest systems crash, another gets accused of rigging interest rates or, worse, acting as a ‘rogue institution’ in breach of regulations.
Neither has the news been good if you are one of the small businesses out there hoping to use a business loan to expand your firm. The latest figures released by the Bank of England show that lending to businesses has continued to fall and is now more than 25% below its peak at the end of 2008.
The experts seem agreed that bank credit is likely to remain scarce for the foreseeable future.
In all honesty, it’s no surprise that banks aren’t lending. New regulations are forcing them to keep more of their capital in reserve to protect against disasters and, even when there is capital available, the current system makes it far more cost effective for banks to make larger loans rather than lend to the small, independent businesses on which our economy depends.
Every economy needs a thriving small business sector to boost employment and growth. Britain is lucky enough to have a good crop of firms that are poised to grow… so what’s the answer when it comes to business funding?
Increasingly, it seems like peer to peer lending – introduced to the UK for personal customers back in 2005 by Zopa, but now extended into the small business sector by the likes of FundingKnight – holds the key.
Peer to business lending works by pooling together funds from everyday savers who want a better return on their money and channelling it into business loans.
One business loan is made up of lots of little loans from individual lenders. Each lender can invest from as little as £25 and are encouraged to spread their funds amongst lots of loans in order to reduce risk.
Businesses benefit from a new source of alternative funding and savers get a better return on their money. It’s a bit like commonsense banking, really. A better way to lend. A better way to borrow.
Of course, every loan needs to be repaid, so what strings are attached?
Peer to business lending usually offers business loans at rates of between 8% and 12% but the actual rate that borrowers pay is determined by the lenders who decide to invest in the loan. That means that the more lenders you can convince to participate in your loan, the cheaper your interest rate should become.
Some peer to business lenders, such as FundingKnight, allow lenders to get involved without paying a fee, so as to encourage as many savers as possible to start lending. Other established players, like Funding Circle, do charge lender fees but have already established a larger pool of potential investors.
For businesses the key benefits are likely to be a combination of competitive rates, flexible lending terms – since peer to business lenders can often be more flexible than the big banks – and a refreshingly new attitude to lending decisions.
Peer to business lenders carry out industry standard credit checks, just like mainstream banks, but most also have their own lending criteria and are prepared to look beyond bricks and mortar assets and “normal” scorecards.
In many ways it combines the best of both worlds… wrapping up the ease of applying for a loan online with some of the traditional, common sense values that have been missing from some financial organisations for too long.
You can read more about alternative finance options in this report from the Federation of Small Businesses, who is encouraging the government to champion new finance initiatives such as peer to peer lending.