One of the biggest challenges an entrepreneur will face is funding their business. If you want to raise money to help your business grow, there are a number of options available to you. This includes traditional funding types like bank loans or private investors, raiding your own savings, or even asking a family member for a loan.
In some cases, businesses can struggle to secure a bank loan. This can leave start-ups and growing firms with a funding black hole they are unable to fill. But now there’s a relatively new funding option available, called peer-to-peer lending, that businesses should certainly explore.
What is peer-to-peer lending?
Peer-to-peer lending removes the traditional lender i.e. financial institutions, from the funding equation. So, rather than borrowing money from the banks, you’re borrowing directly from other people. This allows investors to lend money to unrelated individuals or businesses – peers – without having to go through the conventional routes.
In 2014, the Financial Conduct Authority began regulating the peer-to-peer loan industry. It introduced rules to ensure firms: present information clearly when looking for investors; are honest about the risks they face; and have plans in place in case things go wrong.
Where can you find a peer-to-peer loan?
There are a number of websites that can act as the intermediary in the peer-to-peer lending process, carrying out credit checks and making sure a number of requirements are met. Of course, these services are not provided for free. There is a small fee, and just like the banks, you will find different terms and rates depending on where you look.
Examples of popular peer-to-peer lending sites include: Funding Circle, Assetz Capital and Zopa.
What are the benefits of peer-to-peer lending?
Peer-to-peer lending has several advantages for growing businesses:
- It’s fast – Funds are often available within as little as a week;
- It’s flexible – Loans can be agreed over terms of three months to five years;
- You’re more likely to be accepted – Increasingly the banks actually refer customers to peer-to-peer lenders if they are better placed to offer funding.
And the drawbacks?
As with every business funding type, peer-to-peer lending does have its drawbacks:
- Credit rating counts – While it might be easier to get funded than through a bank loan, unproven businesses might still find it difficult. You’re unlikely to be accepted if your credit rating isn’t great;
- Interest rates – The interest charges can be more than you’d pay on a bank loan;
- Arrangement fees – Arrangement fees can be expensive so you’ll have to shop around.
How can we help?
Prosper provides a comprehensive approach to accountancy, tax & business growth services for start-ups, SMEs and growing companies across the UK. We are your bookkeeper, accountant and finance director all rolled into one. Check out letsprosper.co.uk to learn more about how we can help your business.