Obtaining the best finance suited to your needs can be challenging for small- and medium-sized enterprises (SMEs). Peer2Peer Finance News delves into the potential pitfalls and opportunities, and looks at where peer-to-peer finance can help…
Where to begin when looking for finance
“The key thing is making sure that you’re looking for the right type of finance,” explains Paul Marston, managing director of commercial finance at peer-to-peer lending platform RateSetter.
“Do you need a loan, or working capital, i.e. a revolving facility, or equity?”
After choosing the right product, SMEs need to make sure they understand all aspects of the process, Marston adds.
“SMEs should ensure that they have the ability to pay back the term debt, that the finance provider’s fees are transparent and that they understand the repayment charges,” he says.
What is P2P lending?
P2P lending comprises an online platform that connects investors with borrowers, in return for a fee. Part of the alternative finance space, they are competing with other lenders such as challenger banks, as well as high street banks. A number of P2P platforms provide loans for small businesses, such as RateSetter, Funding Circle, ThinCats and Folk2Folk.
Why should SMEs consider P2P?
High street banks are not suitable for everyone. They tend to have quite prescriptive lending criteria, which means that many SMEs will get rejected even if they are perfectly eligible for a loan.
A survey by the British Business Bank for 2015/16 found that 100,00 small businesses were rejected for loans by mainstream lenders – equating to £4bn of potential finance.
The P2P industry argues that rather than just taking the business the banks don’t want, it can provide more specialist finance solutions more quickly and with better customer service. P2P platforms are small and nimble, cutting down compliance costs and making the process faster.
“We often hear SMEs say that they’re ‘going around in circles’ or ‘tearing their hair out’ when they go to banks for finance,” says Conrad Ford, founder of alternative finance aggregator Funding Options.
“P2P lenders and other challengers give a much better, quicker service.”
And SMEs looking for unsecured loans should certainly consider P2P, says Ford.
“At the moment P2P lenders are the most likely finance providers to do large, unsecured business loans,” he comments.
“If you’re an SME and go to the bank for an unsecured loan, there’s a cap of around £50,000, whereas Funding Circle will offer up to £350,000.
“A lot of high-growth businesses are asset light. This is a sweet spot for P2P.”
Funding Circle explains that it offers four key benefits for SME borrowers: speed, flexibility, efficiency and transparency.
“We understand that for small businesses, the opportunity to seize a growth opportunity doesn’t always last indefinitely,” the platform says.
“Therefore, they appreciate how quickly we respond to, and process their application: they can apply online in ten minutes, receive a decision in 24 hours and funds are typically deposited to their bank account in less than five working days.”
As P2P platforms are purely online, busy business owners can apply for finance outside of working hours. “More than 50 per cent of loan applications are made outside of working hours, when a bank branch would be closed,” says Funding Circle.
RateSetter’s Marston emphasises the point that P2P platforms offer advantages over high street lenders and that it is the industry’s responsibility to convey that message.
“We’ve set ourselves up as a true alternative to banks, not a lender of last resorts,” he says.
Who is eligible for a P2P loan?
While criteria varies from platform to platform, P2P loans are often more suitable for businesses that are slightly more established. For example, RateSetter offers loans to businesses that have been trading for at least three years and has at least two years of either audited accounts or formally prepared management accounts. And Funding Circle only lends to businesses that have been trading for more than two years, have a turnover of more than £50,000 and are a UK limited company.
However, there are still options for start-ups. Crowd2Fund has recently launched a ‘venture debt’ product which enables early-stage companies that are not cash-flow positive to access debt finance. Crowd2Fund argues that this can be simpler than raising equity and enables founders to keep control of their company.
What about cost?
P2P loans aren’t always cheaper than going to a high street bank – it really depends on the individual facility, risk and platform. However, P2P lenders tend to argue that their rates are competitive bearing in mind the other benefits they can offer.
The bank referral scheme
Under a government initiative that launched last year, nine of the UK’s biggest banks will pass on the details of small businesses they have rejected for finance to three aggregator platforms – Funding Xchange, Business Finance Compared and Funding Options.
These platforms will then share the details of the businesses seeking loans with alternative finance providers, who can provide quotes if they wish.
Funding Xchange claims that a business using its platform can expect an average saving of £2,000 by comparing pricing from multiple providers – representing 10 per cent of the value of the average loan.
“It can be a bit scary if a bank manager says they can’t fund you, but it’s not necessarily a reflection on the business,” said Katrin Herrling, co-founder and chief executive of Funding Xchange, at the time of the scheme’s launch.
“This scheme gives businesses the confidence to move forward and not let rejection from a high street bank hamper their plans for growth.
“Alternative finance providers tend to be highly specialised in terms of credit risk assessment so are better positioned to offer loans in certain situations where banks will not help.”
Are you a small business interested in a P2P loan? P2PFN is keen to hear from potential borrowers, so please get in touch by emailing email@example.com.