Peer to Peer Lending – goes where no bank has gone

In the third part of our series on “How Fintech is disrupting SME and Start up Financing”, we present to you the key p2p lending platforms in the marketplace.

During the year 2016, peer to peer lending in the UK had an impressive growth validating its role as an alternative financing method. While there is much speculation on the future of the economic conditions, there is an optimistic outlook towards peer-to-peer lending and the peer to peer platforms.

 

The UK’s traditional lenders reported a decline in demand for business loans from SMEs in 4Q16 while peer to peer lending observed a 27% q-o- q rise. There were 4,000 more businesses (i.e. 16% rise) turning topeer to peer platforms in the 4Q16 for loans.

The global peer to peer lending market had a superlative growth between 2014 and 2015.

The major sectors using online alternative financing include manufacturing and engineering, business and professional services, and real estate and housing. There are exclusive real estate alternative finance models that have also observed a spurt in their
growth.

What is peer to peer lending?

Peer to peer lending platforms play match-maker between individual borrowers and lenders, without involving a traditional financial institution such as bank. Lenders charge higher interest than banks in return for the risk of loan default.

However, the peer to peer lending platforms claim to evaluate borrowers’ credit worthiness and pursue the borrower for repayment on the lenders’ behalf. Some peer to peer lending platforms maintain a provision for bad and doubtful debts in the interest of lenders.

The peer to peer lending websites apply data-driven, semi-automated credit scoring models. The models are innovative in sourcing unconventional data points. Sonotwithstanding limited credit bureau information, peer to peer lending platforms can assess credit risk where banks struggle. Unlike consumer peer to peer lending, underwriting entails discretionary decision-making.

How does it work?

  

Where are the funds for credit coming from?

Peer to peer lending has introduced investors with a higher risk appetite as lenders within the SME and Start up financing marketplace.

While retail investors were originally the focus, institutional investors are dominating the peer to peer lending marketplace now. Institutional lenders are usually hedge funds, pension funds and asset managers. Platforms are increasingly segmenting the riskier segments of loans for institutional investors.

What are the benefits to a Start up or SME?

Peer to peer lending platforms mean quick and convenient application, processing, and disbursement of finance to SMEs and Start ups, all the while banks can’t or won’t.

Since, no collateral is required in most of the lending, SME or Start up with rather stable cash flows but no tangible collateral can still raise funds.

Who are some of the key peer to peer lending platforms?

  • Zopa

Country: UK

Launched: 2005
Amount lent to date: <£1.6B
Number of active lenders: 50,000
Origination fee: 0—2%
Profile of borrowers: Usually homeowners
Borrower average annual turnover: £30,000—40,000

  • Ratesetter

Country: UK

Launched 2010
Amount lent to date <£1B
Number of active lenders: 33,000
Origination fee: Depends on borrower
Profile of borrowers Individuals | Businesses | Property developers
Loan size: £25,000—300,000

  • Funding Circle

Country: UK
Launched: 2010
Amount lent to date: <£1.4B
Number of active lenders: 46,900
Origination fee: 2—5%
Profile of borrowers: Well-established business
Borrower average annual turnover: £50,000—600,000
Loan size: £5,000—1,000,000
Term of loan: 1—5 years

  • Lending Works

Country: UK
Launched: 2014
Amount lent to date: £21.5M
Number of active lenders: 1,250
Origination fee: Depends on loan
Profile of borrowers: Usually home owners
Borrower average annual turnover: £33,945
Loan size: £5,759
Term of loan: 39 months

  • LeadInvest

Country: UK

Launched: 2013
Amount lent to date: £700m
Number of active lenders: 3,000
Origination fee: Depends on borrower, loan, and collateral
Profile of borrowers: Professional landlords and developers looking for short-term mortgages to buy, build or renovate properties
Loan size £600,000
Term of loan 7—8 months

  • Lending Club

Country: US

Minimum Credit Score: 660
Approval Time: 7 Days Average
Loan Amount: $5,000—300,000
Origination Fee: 1—5%
APR: 6.48—29.99%
Loan Terms: 1—5 Years

  • Prosper

Country: US

Minimum Credit Score: 640
Approval Time: 7 Days Average
Loan Amount: $2,000—35,000
Origination Fee: 1-5%
APR: 6.73—35.36%
Loan Terms: 36 or 60 Months

Given that SME and Start-ups are a major source of employment in the UK, their survival ensures healthy sustenance of the economy. So, peer to peer lending platforms keeping the lifeline strong is crucial for the UK not only this year but for years to come