If you’re a small business owner and either a) despairing ever finding finance through a bank loan or b) have no idea how to get to grips with any of the alternative finance options, we’re highlighting a different alternative finance option every couple of weeks. This week the spotlight is on …
Peer to Peer lending
The best known example of a peer to peer lending marketplace is Funding Circle, established in the UK in 2010, so we’ll use them as an example. The service works by allowing those who want to invest (typically looking for high, long term returns on their money) lend directly to small businesses. By cutting out the bank, fees are lower for borrowers and lenders get a higher return. It’s a more risky venture for investors than depositing funds in the bank, so they will lend to a number of different businesses to limit their risk.
It’s a good option if you:
- Want to borrow between £5,000 and £1,000,000 and need to receive the money relatively quickly (1-2 weeks – applies to Funding Circle other peer to peer lending marketplaces have different terms)
- Want to be flexible about the amount you borrow (banks may sometimes tie small businesses into larger loans than they need)
- May want to repay early – there are no early repayment fees
It may not work for you if:
- You’ve been trading less than 2 years
- You’re not happy being in a direct lending contract with the lender – services like Funding Circle facilitate the matching investor & borrower, but the lending agreement doesn’t involve the lending platform.
As with any way of generating finance, this option has risks and pitfalls that apply differently to different kinds of business, which you should check carefully if you’re considering it. Here you can find out more about Funding Circle’s terms and conditions for borrowers. It’s also worth considering other peer to peer lending services, as Funding Circle is no longer the only one. Other marketplaces suitable for small businesses include:
Ratesetter (loans from £500 – £2,000,000)
Thincats (loans from £100,000 – £5,000,000)
ViaInvest we only just learned about this one as we were going to press – a start up from Latvia launched this month that integrates a semi-private lending platform with a public lending market place to give more security to investors. We’d recommend seeing how their business model settles in the early days before considering using them.
Other articles in our alternative finance series: