What is P2P lending?
Peer-to-peer (or P2P) lending is a form of direct lending or ‘social lending’ that takes place online between individuals who want to invest or borrow money.
P2P platforms allow individuals to borrow and lend from each other without the need for an intermediary such a bank or credit union. Unlike a traditional bank, a P2P platform has none of the expenses of a brick and mortar store.
Although some have questioned their meteoric rise and attributed successes to the reduced power of banks in the wake of the 2008 financial crisis, P2P lending is a fast-growing and maturing asset class with a myriad of benefits for companies and 2018 is shaping up to be an excellent year for the industry.
How can P2P lending benefit my company?
P2P lending is a way to source alternative finance and complex funding types for a variety of industries.
There are many ways in which P2P investment could benefit your company. Lenders receive interest rates far higher than those offered by a bank and can thus make a bigger profit. P2P lending is also more cost-effective for borrowers than bank loans, which incentivizes the process.
P2P lending can be a way of securing a loan more swiftly than borrowing from a bank, which is a time-consuming and process. Banks are also typically more inflexible regarding the types of business to which they offer loans. As a result investors benefit from a diverse range of companies that can borrow swiftly.
What should I be aware of before engaging in P2P lending?
There are many risks intrinsic to the P2P lending model and companies looking to borrow or lend money from a P2P source should be aware of the potential pitfalls in order to prevent losing capital.
The most notable and well-publicized risk is that the money you lend is not safeguarded as well as it is in a bank. Although some P2P platforms do offer contingency capital in case a borrower defaults – and others have insurance policies in case a borrower loses their job or dies unexpectedly – it is still undeniably a more risky option than an investment from a traditional source.
Ensure that you check the bad debt figures of a P2P platform before committing. These include loan write-offs as well as default figures.
In order to mitigate an investor’s risk, many P2P lending companies recommend using the ‘autobid’ function, where no more than 2% of an investment makes up any one loan. A few, such as Funding Circle, do not allow manual bidding at all.
If you are an experienced investor and used to managing your own asset portfolio, you may wish to seek out a P2P lending company where you can directly choose the companies in which you invest.
If you are less experienced or have less time on your hands, opting for autobid is a sensible decision. Your money will be spread across a wide range of borrowers – sometimes as many as 250 – in small increments to safeguard you against losses.
How do I know that a P2P lending platform is reputable?
Before commiting to a P2P lending platform, check who else has invested in them. Large corporations have financial experts at their disposal who will have researched any investment thoroughly.
You should also check that the site itself is secure. Due to the fact that you will be sharing sensitive and financial information, you need to know that you will not be at risk from hackers.
According to Investopedia, there are several warning signs to look for in a P2P company:
- They aren’t interested in borrowers’ credit history – every P2P company should perform thorough checks on prospective borrowers’ creditworthiness before approving any kind of loan. If the company you approach offers loans without first needing to check credit history, this is an obvious sign that they are disreputable
- They charge upfront fees – no legitimate P2P company charges fees prior to borrowers receiving the loan. Any attempt to take money from a borrower before securing the loan is a scam and you should not invest
- They guarantee a loan – with P2P companies there is never any guarantee of a loan as this decision is dependent on a lender. Again, this indicates a scam
- They aren’t registered in your state – the first thing any business considering a P2P loan should do is check that the company is registered. You can do this by contacting your state attorney general
If the P2P platform you are considering displays these signs, don’t put your investments at risk. Find somebody more reputable.