What is P2P business lending?
Taking out a peer-to-peer business loan means that while you apply to a lender, your loan will actually be financed by a peer investor/s. The P2P "lender" acts as an intermediary for the loan, charging a fee for doing so. The application process works in a similar way to any other lender, but the source of funds comes from a single investor or pool of investors. When it comes to repaying the loan, you repay the investors directly using the lender as an intermediary.
How does the peer-to-peer business loan application process work?
Peer-to-peer business loans are available for a variety of business purposes. Applying for one of these loans still requires that you meet the lender's eligibility criteria. You will usually need to be over the age of 18 and the company director/s will need to have good credit history.
The loan is risk-based as it is financed by investors, so the higher a risk you're determined to be to fund, the higher your interest rate will be. Once your application is accepted by the lender it is posted up for potential investors. One or several investors fund your peer-to-peer business loan until you receive your entire loan amount. Then you repay these investors directly, usually via direct debit.
How is P2P different from a standard business loan?
P2P business loans work just like other forms of business loan. The only notable difference is that your funding comes from a panel of investors, rather than a bank. This can have a number of benefits for investors and borrowers. For instance, P2P platforms claim that investing in P2P loans offers more competitive returns than other forms of investment, while enabling borrowers to still potentially pay less in interest and fees. Eligibility criteria and lending options are also more flexible and varied.
P2P loans may also be easier to qualify for than traditional bank loans, which often require you to have a minimum business trading time and a good credit history.
What features do P2P business loans offer?
Peer-to-peer lenders typically offer these features:
- Convenient application. Most lenders let you apply online in a few minutes. You'll usually find out if you're eligible that same day or very soon after.
- Easy repayments. You won't have to worry about making your repayment on time – repayments are direct debited out of your nominated bank account on the due dates.
- Borrow and invest. There are features for both business owners and investors, with investors having access to a new asset class that potentially yields high returns, and business owners being able to apply for an alternative source of business finance.
How you can compare your options
Finding a P2P lender that matches your business needs is important. No matter what you need the loan for, keep the following points in mind when comparing your loan options:
- Loan purpose. Business peer-to-peer loans are available for a variety of purposes, but it's best to confirm the suitability of the loan before submitting your application. Make sure to check whether the loan is only available for new or established businesses.
- Business eligibility. Does your business need to have been established for a certain period of time? Does it need to have a certain annual turnover?
- Loan cost. The interest rate for a P2P loan is usually determined on a risk basis. This is calculated using the information you provide in your application. However, you need to keep in mind that upfront establishment fees, early repayment fees and other fees may apply.
- Turnaround time. Will you be able to get the loan when your business needs it? Check the average turnaround time offered by the lender you're applying with.
What benefits and drawbacks come with these loans?
- An alternative source of funding to traditional banks.
- Business loans from peer-to-peer lenders can offer more competitive rates.
- A quick application and a fast turnaround time.
- Interest rates vary depending on the information you provided in your application.
- Regular repayments may not suit businesses with irregular profits or businesses that are seasonal.
How can a P2P lender give you a better deal?
P2P lending is generally a more competitive market than traditional bank loans. This is because P2P platforms are entirely online, with fewer operating costs than banks. Therefore, if you have a good credit rating and a profitable business, you may be able to access a better deal with P2P than if you opted for a bank loan.
Is peer-to-peer lending safe?
P2P lending is, like all loans (including loans for a business purpose that are not regulated under the National Credit Act), regulated by ASIC (Australian Securities and Investment Commission) and is subject to consumer protection provisions. This means that P2P lending is just as safe as any other form of business finance.
However, like with taking on any other form of business finance, there is an element of risk involved with P2P business loans, for both investors and borrowers.
- Failure to repay. A borrower's circumstances can change over the life of a loan. They could face illness or job loss that may mean that they are unable to continue to make repayments. In these instances, the borrower can apply for a hardship variation. This means that they may be able to repay then loan over a longer period or time, or repayments may have to be frozen for a certain amount of time.
- Credit risk assessment. How the P2P operator that offers loans assesses a borrower's ability to meet their repayments can vary from platform to platform. The result may be less robust than an external credit reporting agency.
- Lending risk. Many P2P loans are unsecured, which can pose a risk to the investor, as the loan funds cannot be recouped by selling the borrower's property in the case of loan default. Platform operators may also not disclose the risk-assessment of each borrower to you, so you may not be certain of the level of risk that you are taking, even with "low-risk" loans.
- Platforms not having a stake. If the P2P platform doesn't lend any of its own money, the lending risk is on you alone as an investor. This could mean risking some, or even all, of the money you lend.
- Lack of government protection. P2P lending does not offer government protection, guarantees, or compensation for investors. Your chosen P2P platform may offer you some protection, but it is not a legal requirement.
- Compensation adequacy. If a P2P platform operator sets aside compensation funds for investors, there may not be enough to compensate everyone.
- More relaxed lending criteria. If you have a bad credit history, or are a startup business and have not been trading for a significant length of time, getting a P2P business loan could be easier than getting a traditional business loan. While this could be useful to you, having poor credit or being a startup may mean that you find it harder to repay the loan, increasing your chance of potential default.
- Uncertainty. Because most P2P loans are risk-assessed, you generally won't know the interest rate that you will be charged for certain until you submit an application. However, you can generally get a rough idea by understanding your credit score, or requesting a rate estimate from your lender.
- Expense. While P2P loans are often more competitive than traditional business loans, if you are a new business or have a less than perfect credit history, you will likely be charged more than someone who has good credit history or a significant length of time trading. However, bear in mind that the alternative would potentially be not getting a loan at all.
- Potentially less funding available. If you're looking for a large business loan, you might find that the level of funding that you require is less likely to be available from a P2P platform than from a traditional bank.
Which businesses are most suited to P2P borrowing?
While P2P borrowing is suitable for businesses of any industry, size and turnover, it can provide an easier avenue to finance for certain types of businesses. These could include:
- Startups. P2P lending platforms may be more inclined to lend to startups than bigger banks. However, you should be aware that higher risk borrowers may receive higher interest rates and fees than lower-risk borrowers.
- SMEs. Loan products like invoice financing solutions and small business loans that are popular with SMEs are often featured on P2P lending sites. These solutions can be useful for businesses looking to support their cash flow.
- Businesses without real estate collateral. Most P2P loans are either unsecured, or are secured against assets such as machinery or accounts receivables, rather than real estate collateral. This can be useful for business owners who don't own real estate, or who don't wish to use their home as loan security.
Is there anything to consider before applying?
Before applying for any type of credit it's important to compare your options and consider if the lender is right for you. While you generally won't be given an interest rate until you submit your application, you can find out about application fees as well as ongoing fees to give you an idea of the cost of the loan. It's also best to confirm your eligibility before submitting your application if you are unsure about criteria. Once a loan is offered, compare it to conventional business loan rates to make sure you're getting a competitive deal.
Peer-to-peer business lenders can offer a competitive source of business finance to consider, but it's always best to compare your options thoroughly before settling on which funding avenue to take. Find out more about consumer peer-to-peer lending
Alternatives to business P2P loans you can apply for
If you're waiting on payment from invoices that could help you manage your cash flow, invoice financing could be an option to consider. It's a type of business loan that is secured by the unpaid invoices and comes with reduced risk, no asset requirements or interest payments.
Compare invoice financing products below.
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