In 2005, Zopa's launch brought peer-to-peer lending to the UK. In 2013, P2P and crowdfunding are set to raise £1.9 billion.
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div>In 2005, Zopa’s launch brought peer-to-peer lending to the UK. In 2013, P2P and crowdfunding are set to raise £1.9 billion.
The social lending concept of P2P links investors to individuals who want to borrow or SMEs seeking to raise funds. Cutting out the role of the intermediary, the arenas allow direct contact between lender and borrower.
P2P works on an online auction based system where sellers set the maximum cost of finance. The competition between buyers forces down the cost of the capital.
There are two types of auction: the dutch auction and the fixed rate. The former is where the lender with the lowest offer wins. The latter involves the borrower specifying the fixed rate and the lenders race to fill the loan.
This alternative lending format allows loan terms from approximately 6 months to five years with investments starting at £10.
P2P allows for quick decisions and easier terms. The industry is growing fast with new platforms arising monthly and is always open to more borrowers.
Funding Circle, a P2P platform with 55,000 registered lenders, has an underwriting process that can give approval in three working days.
Some are sceptical of P2P because of its risks, like borrowers defaulting. Also, a lender’s money on P2P websites does not lie under the Financial Services Compensation Scheme. In the case of a loan business failing, this scheme would protect deposits of up to £85,000. Therefore, without this scheme investors would have to bare any losses.
The crash of P2P lender Quakle in 2011, shook the nerves of the industry after rumours of very high default rates. The platform used to allow interest rates to be set up to 25 per cent for very risky deals.
However, P2P heavyweight, ZOPA, states it has a 99 per cent repayment rate and like other platforms it has stringent checking processes. P2P sites Funding Circle and Thincats both assert first charges on assets.
Funding Circle, who have seen £146 million in loans to UK SMEs, has a sensible risk assessment plan that grades borrowers into five bands. Each band matches the interest rate given, the riskier the deal the higher the interest rate. To qualify as a borrower, Funding Circle asks for two years of accounts at least £100,000 annual turnover. They also ask for business plans, management accounts and projections.
P2P sites are regulated by the Office of Fair Trading and are also guarded by the Peer to Peer Finance Association (P2PFA) membership. Members of the P2PFA must have a sturdy capital base and a solid plan to reimburse lenders if the company goes bust. The treasury is in current discussions about regulation for P2P.
Crowdfunding is a new take on P2P lending involving investors bidding online for funding opportunities. Both mediums allow investors to spread their risk across a number of projects and have relatively low sign up fees.
So both are similar in concept but the main difference between the two is that crowdfunding primarily relates to start up businesses or projects whereas P2P is intended for established SMEs.
Another large difference is that crowdfunding refers to contributions that the business does not have to repay in all cases. Returns can include revenue, or acknowledgements or other tokens of gratitude. P2P refers to private loans with financial returns.
There are approximately 700 different crowdfunding platforms worldwide, who all draw from a collection of people rather than just one on one. Peer-to-peer lending can refer to either.
On commenting on how crowdfunding fits into the existing lending market, founder of invoice crowdfunding Platform Black, Louise Beaumont said: “Platform Black acts as complimentary finance- not competitors. We fund things for Aldermore, we fund things for Shawbrook.” She added: “We are not a threat to the banks or lenders we are absolutely complimentary”
Platform Black currently trades at over £5 million per month and has a 100 per cent success rate in auction. Louise Beaumont says this linked to the fact that Platform Black thoroughly vets all its members and auctions.
Find below an index of P2P lenders:
- CrowdMortgage
- LendInvest
- Funding Circle
- LendLoanInvest
- Relendex
- ThinCats
- Mayfair Bridging
- Assetz Capital
- Be the lender
- Buy2letCars
- Emoneyunion
- Folk2Folk
- Funding Empire
- Funding Knight
- Funding Secure
- Funding Secured
- RateSetter
- Rebuildingsociety.com
- Squirrl
- The Lending Revolution
- Trufis
- Yes-Secure
- You Angel
- Zopa
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