Can peer-to-peer lending fund my business?

When banks say no, some risk-takers will turn to higher-risk lenders. Instead of venturing into a predatory marketplace, entrepreneurs may want to first consider whether peer-to-peer lending could be a viable funding option.

Getting the necessary capital, no matter how small can be a big deal for a small business. While small business loans are often thought of as a way to purchase a vehicle or expensive equipment, often times an entrepreneur just needs a few hundred pounds to buy inventory.

What is peer-to-peer lending?

The most basic form of borrowing is getting someone to take a chance on a new idea and providing a loan to help capitalise a new or existing business. Larger loans mean consolidated risk, and a big bank may not be willing to risk £5,000 on an idea. What peer lending does is allow for a capital need to be matched with dozens of fellow citizens that are looking for ways to invest small amounts of money, yet in a way that could be socially responsible.

Anyone can certainly raise capital from friends and family. That is the most basic form of peer lending.

In recent years a few aggregators have come to market to facilitate these exchanges. While essentially serving as brokers, these aggregators serve as a platform where potential funders may choose potential capital projects to invest in. Small business owners can list needs and wants so that they may attract outside investment.

Just like any brokerage arrangement, the aggregators that establish these peer lending marketplaces generally take a cut. This “cut” depends on the provider.

• Zopa claims to be the UK’s leading peer-to-peer lender. While it charges a lender a flat 1% annual lender fee, borrowers are also charged. An additional percentage is rolled into the APR, making it unclear how much Zopa charges borrowers on average.
• Funding Circle charges a 2.99% origination fee to the borrower, which could push up its stated interest rates (9.99% to 24.89% at press time) to include a much higher representative interest rate. It is unclear whether Funding Circle also takes a cut of the interest charges.
• Lending Works charges a maximum 1% fee to lenders, plus an additional .6% for “quick withdrawals.” Borrower fees are rolled into the APR, so it is again unclear what portion of the actual finance charges are paid to the peer lender and what is retained as a broker commission.
• RateSetter reveals each peer lender’s share of the total returns as a simple stated rate of return. Investors may submit a few pounds for a month, a year, 3 years or 5. The longer an investor leaves their money in, the higher the rate earned. This arrangement opens up the possibility of the aggregator making more money per pound lent than is common with competitors.

Other peer-to-peer lending platforms serving the UK include LendInvest, Madiston, QuidCycle, Wellesley & Co., ThinCats, Assetz Capital, rebuildingsociety.com and FundingKnight. Peer lending can be done by non profit firms or for profit solicitors. The vast majority of peer lending platforms are owned by solicitors. While this approach allows borrowers to dodge banks, many peer-to-peer aggregators are actually backed by banking institutions.

There are a few nonprofit peer-to-peer lenders such as the leading international firm Kiva. However Kiva favours the developing world and does not currently have any partners in the UK or Western Europe for that matter.

Entrepreneurs should consider whether peer-to-peer loans or any microfinance option will be the best solution as well as whether it will help to accomplish their goals. As with any debt, the funds must be repaid with interest.