Peer to business lending (P2B), also known as crowdlending, crowdfunding or peer to peer lending is a relatively new way for businesses to access funding and business loans.
Put simply, a business applies to borrow some money via a P2B website or online marketplace. Their application is credit checked and analysed and, if successful, offered up to the general public using a P2B Lending platform to share details of the loans on offer.
Everyday savers and investors bid to participate in loans, each contributing as much or as little as they choose, so that one business loan is made up of lots and lots of little loans from individual savers.
Businesses benefit from a new source of business finance and savers get a chance to make their money work harder.
So how exactly does peer to business lending work? Where did it start and what are the key things to be aware of?
In conjunction with FundingKnight, a new P2B lender in the UK, we’ve put together a 4 part series to give you the low down on how peer to peer finance can help small business funding. Visit the FundingKnight blog for more P2B news.
Part 1 – P2B Lending, the basics
What is peer to peer lending?
Peer to peer lending is the process by which one person lends money to a stranger or ‘peer’. Instead of using a bank to facilitate the loan, the lender and borrower are matched by a peer lending platform.
In the UK, the largest and most well known peer to peer lending is Zopa
So, how does peer to business lending differ?
Peer to business lending uses exactly the same principles but, instead of people lending to other people (consumer lending), people club together to offer loans to businesses (commercial lending).
For the lender, this means that instead of relying on one individual’s ability to repay a loan, there is a whole business dedicated to ensuring that the business goes from strength to strength and pays back all loans on time.
Of course, businesses can also go bust so lending to businesses is not automatically ‘safer’ than lending to individuals. You can, however, find out a lot more information about businesses who apply for loans and this, coupled with the raft of credit checks that peer to business lenders carry out should help you decide whether a loan offers a good potential for investment.
On the borrowing side, P2B Lending creates an alternative to traditional bank based finance. Given that many of the mainstream banks are cutting back on lending in order to boost their capital reserves, new financing options are a useful way to boost business development.
Peer to business lending has none of the huge cost overheads of running a large financial network which means that it doesn’t need to focus on economies of scale and favour large borrowers over small ones. In fact, P2B Lending can be an ideal way for small businesses to borrow money due to the greater flexibility in lending decisions and loan terms.
How does peer to business lending work?
There are 6 simple steps involved in the crowdlending process:
- Businesses apply for business loans, attracted by competitive rates and flexible terms.
- The P2B Lender decides whether or not to accept the application and gives the borrower a risk score based on internal and external credit checks and, usually, their own credit evaluation model.
- The loan is listed on the P2B website and lenders bid online to take part.
- Each lender decides how much they want to invest, starting from as little as £25.
- One loan is made up of many parts, each owned by an individual lender.
- Lenders can build up their own portfolio of loan parts covering lots of different businesses to help spread risk.
Who are the key players in the UK?
Funding Circle launched peer to business lending in the UK back in 2010. Since then, Thin Cats and FundingKnight have created their own platforms to allow savers to invest in British businesses.