What is peer-to-peer lending?

Peer to peer (P2P) lending started as an industry in 2005 when paltry saving rates prompted many savers to consider other ways of generating a decent return.

This type of lending matches borrowers and lenders directly, cutting out the ‘middleman’ allowing investors to receive the interest and principal paid by borrowers. P2P lending aims to give both investors and borrowers a fair rate.

There are a growing number of websites that offer this type of lending, but equally there are companies such as Folk2folk which offer local P2P lending. This type of company will only help to provide finance to business owners that want to grow, diversify or refinance with an aim of creating financially and socially sustainable communities.

See also: Should a start-up business go to the bank first

Many people may be unaware of the importance of such assurances offered by companies such as Folk2folk due to the UK’s P2P sector being made up of unsecured consumer and business lending, as well as secured business lending.

How can a P2P secured business loan help my business?

Secured business loans can be a positive way of growing, diversifying, starting-up or refinancing for a business because your security can avoid the need for an upfront deposit. However, be aware it’s not uncommon for lenders to turn down the majority of loan applicants as they need to be seen to be protecting their investors.

But, by offering up property as a security on the loan for example, it ensures there is something real behind each loan which can help reduce the risk to lenders and can make the decision to lend more appealing.

This is also known as asset-backed lending, it means if a borrower defaults on their loan there is a sellable asset which can help get the lender their money back.

See also: Finance options for farm and rural start-ups and expanding businesses

Folk2folk is one example of such lending platforms that make interest only secured loans against specific assets such as property or land, making each lending agreement a secured loan. The level of security is based on the value of a property, rather than on business projections.

This is especially important when each loan is fulfilled by just a handful of investors, as well as borrowers who know that their backers have provided their own funds to support their business plans.

This sense of accountability is crucial and potentially increased when borrowers and lenders are local rather than chosen at random through a computerised algorithm.

Why local lending matters?

With so much of our finances carried out on the internet these days, from online banking and shopping around for insurance to P2P loans, it’s easy to forget how the money we use for our business growth, via a loan, can come from an individual possibly in your local community.

With a secured loan from a local source, business owners can see the reality of where their money comes from making it tangible, personal and a bit more emotive compared to borrowing from a bank or faceless provider.

When a lender backs a business in their local area they want it to succeed, not just because of the interest they stand to earn, but because they can see for themselves how it can help the local economy to create financially and socially sustainable communities.

Secured lending allows local entrepreneurs, many of whom are struggling to find funding from traditional sources, access to much-needed capital to drive their business forward.

Crucially, secured P2P lending can provide borrowers with certainty and peace of mind in a very quick timeframe as funds can appear in accounts in a couple of weeks. This provides confidence to allow businesses to grow in the knowledge their land or property acts as a layer of security to lenders.

Peer-to-peer lending is not a savings product and is not covered by the FSCS. Investors capital is at risk.

Checklist for eligibility for a secured business loan in the UK?

  • Have land or property, other than their home, against which to secure the loan
  • Looking to borrow £50,000 or more
  • Be based in the UK (excluding Isle of Man and Channel Isles)
  • Be over 18
  • Able to pass credit and reputational checks
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