What is peer to peer lending?

The world of business finance is littered with a mindboggling array of jargon-heavy terms and although SME leaders are renowned for their business acumen, keeping up with such a proliferating lexicon is a true challenge. Here we help you navigate your way around a world of financial products that could easily leave your head spinning unless you have a jargon-buster at your fingertips.

Peer-to-peer (P2P) lending/funding is now an important source of finance for early stage SMEs that you probably won’t hear much about from your bank’s business account manager.

Since the global recession, we live in a world where traditional sources of external finance have become heavily encumbered with rigorous and somewhat opaque new lending regulations and policies; the net effect of this is to make them rather more risk averse than they were in the past. That is where finance options such as P2P lending platforms really start to come into their own.

Peer to Peer platforms replaces the traditional banks

Essentially, they are tech-enabled means by which investors, businesses and individuals can lend to SMEs for specific projects - such new growth strategy, cash flow management or working capital - making a financial return on the interest the borrower pays. If your company has been trading for at least two years, P2P lending may open the door to raising the external finance that your bank may have closed on you. In the US and the UK, the crowdfunding and P2P lending market has been growing vigorously, so much so it has become so diverse there is little help in talking about ‘alternative finance’ as a single entity.

After calls from the providers themselves, the P2P market has been regulated by the Financial Conduct Authority since 2014, which is already bringing it credibility and stability.

Fast, simple and transparent finance is on the agenda with P2P lenders

Importantly, P2P lending is an increasingly credible and used source of finance for mid-market and established businesses as well. However, let’s consider an example of what this diverse form of finance can do for an early-stage small company. This one comes from the CBI’s guide to alternative sources of finance. Heavily pregnant with her first child, Vanessa Blake was discovering first-hand how difficult it can be to get decent sleep at night. Drawing on her personal experience, she designed a pillow and began marketing it at a pregnancy trade show.

Her product proved so popular that she sold out at breakneck speed. The company Dreamgenii started looking into alternative finance options. As a fledgling entrepreneur she was aware that it might be difficult to raise the funds she wanted. She approached a P2P business lender that specialised in loans for small and medium-sized businesses. Within two weeks, the lender had raised and approved a loan of £75,000 for Dreamgenii. The business has since developed a broad range of products that are sold in major nursery retailers across the UK.

Vanessa highlighted a key feature of P2P lending in that many other lenders "viewed us [Dreamgenii] as a venture capital enterprise, but we were keen to keep 100% control of our business", and "without a loan we would have had to invest our own finance into the business."

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