Research carried out by my company, rebuildingsociety.com, suggests that 26% of people in the UK (or up to 12m) would consider loaning money to UK SMEs by joining a peer-to-peer lending scheme (“P2P”) in 2014, when the sector will be fully regulated by the Financial Conduct Authority (“FCA”).
Our research also suggests that 17% (eight million people) would consider P2P lending over the next 12 months, without additional regulatory protection. However, the added security should reinforce the sector, given that money lent through P2P is currently not covered by the Financial Services Compensation Scheme and lenders could lose cash if borrowers default.
Peer-to-peer lending – also known as person-to-person lending, peer-to-peer investing and social lending - is lending money to businesses or individuals online. The sector is set to boom, with as much as £12bn to be lent through SME P2P schemes each year, which roughly equates to one-tenth of total mainstream SME bank lending in 2012.
Our study underlines the attraction of P2P schemes to small firms, with about 24% (or 1.2m) believing they will struggle to access finance in the next 12 months. Given this, 16% of small firms would consider applying for a P2P loan over the next year.
The biggest obstacle to the growth of P2P lending is lack of awareness, with 59% of consumers not knowing what the term meant, while 54% saying that this is the principal reason why they wouldn’t invest in a P2P scheme, with 46% fearing borrowers not repaying the loan.
Typically, individual lenders can earn between 8% and 15% interest through P2P platforms, which is significantly higher than the sub-inflation returns offered by many bank and building society accounts. Basic rate taxpayers currently need to earn 3% on savings and higher rate taxpayers 3.99% just to keep track with inflation.
I believe that P2P lending is well on its way to entering the financial mainstream, thanks to strong levels of interest from consumers and SMEs. The FCA’s regulatory oversight from next year will provide consumers with an additional layer of protection and our study shows this is very likely to boost take-up.
The evolution of this market will continue to generate value for borrowers and lenders beyond the financial transaction. It can be viewed as a marketing activity and businesses that borrow through P2P lending have effectively won a crowd of stakeholders with an interest in the success of those businesses. This is more powerful than institutional finance and both parties are slowly adjusting to this mindset.
Clearly not all individuals and small businesses that are considering using a P2P lender will end up doing so but as long as borrowing and saving conditions remain depressed, demand will rise.
Blog supplied by Daniel Rajkumar, managing director of peer-to-business lending platform rebuildingsociety.com