Crowdfunding/peer to peer
This type of finance is called lots of things, most commonly crowdfunding, peer to peer or person-to-person (P2P) lending. It involves individuals lending money directly to unrelated people and businesses without using a bank or financial institution as an intermediary and allows individuals and organisations to lend money directly to unrelated businesses via specialist websites, without involving a bank or other financial institution.
P2P takes place on specialist lending company websites, providing an online marketplace to bring borrowers and lenders together. Lending companies generate revenue by collecting a one-off loan funding fee from borrowers and a loan servicing fee from investors. The latter may be either a fixed annual amount or a percentage of each individual loan.
How does it work?
Interest rates can be set by lenders who compete for the lowest rate on a reverse auction model. Other P2P lending companies fix the rates offered based on their assessment of a borrower’s credit. So businesses perceived as having a higher risk of default will pay higher rates of interest.
Lenders aren’t protected by any government guarantee, so mitigating risk is even more important than usual. They do this by carefully choosing which businesses they lend to and by spreading their loans among different borrowers.
Are P2P loans expensive?
Many P2P lending sites are automated, which reduces overheads and allows them to offer the service more cheaply than traditional financial institutions. It means borrowers may be able to find more competitively priced loans, while at the same time lenders can earn higher returns.
The benefits of peer-to-peer lending
Competitive rates: Investors compete for your business in a reverse auction where the lowest bid wins.
Fast and easy: it only takes a few minutes to apply online, decisions are usually made within two days, and the money can be with you in as little as 24 hours after that.
Flexible loans: borrow money for all kinds of business requirement, from an injection of working capital to investing in a new asset.