With many UK start-ups finding it difficult to fund a new business, there is an alternative lending option that is currently gaining a lot of press coverage in the press for all the right reasons.
Peer-to-peer lending is a relatively new form of finance (it was established in 2005) and (as of summer 2012) peer-to-peer lenders have since collectively lent £300m.
Peer-to-peer lending is as it sounds, lending money to ‘peers’, without having to go through traditional financial intermediaries such as banks or other institutions. Peer-to-Peer lenders are everyday people who have money they wish to lend out in return for a competitive rate of interest (usually between 6-12% pa).
Currently, these are unsecured personal loans that aren’t subject to regulation, but this will all change in April 2014, after which the Financial Conduct Authority (FCA) will regulate the peer-to-peer industry.
New small businesses are still finding it tough to get a traditional bank loan, as many UK banks are unwilling to underwrite an unproven, new business with no established credit.
This leaves many start-ups in a conundrum, but there are several alternative business funding options worth exploring. However, before making any financing decisions you need to carry out sufficient research so you can carefully weigh up the pros and cons of each option. Choosing a source could be one of the most important decisions you’ll ever make as a new business owner.
How to get a peer-to-peer loan
New business owners pitch their ideas online via peer-to-peer lending company websites to individuals interested in lending to small businesses. The peer-to-peer lending platforms make the process of introducing lenders and borrowers very simple and the platforms are often exclusively web-based. They take much of the administration away that borrowers experience with their high street bank.
As a borrower, you register with a company and you are then put into a category based on your credit score. When grouped, the lender can decide where they want to invest their money based on the risk and return. As with any loan there is a risk, however, the rate of an unsuccessful loan is far lower with peer-to-peer loans than applying for a bank loan.
One peer-to-peer lending platform that has grown significantly since it started in February 2013 is Cornwall-based Folk2Folk. It has introduced £11m of secured loans largely to the business community, starting from £25,000 and up to £1m, at interest rates typically of 7-9%.
Loans introduced so far have gone towards projects such as house building, commercial leisure facilities and property acquisitions, together with various renewable energy projects.
If you plan to start a business but lack funds, peer-to-peer lending might just provide the start-up funding you require.