What is peer-to-peer lending & how can it help SMEs to grow?
When it comes to business loans, many SMEs think no further than their bank. However, mainstream banks are reluctant to lend to growing organisations, as they have a higher risk profile than major enterprises. This often leaves companies struggling to access capital at a critical stage in their growth. Peer-to-peer loans address this gap in the market, offering SMEs better access to business finance, at the same time as providing financial entrepreneurs with the opportunity to support exciting businesses. If you’re a European business struggling to get a bank loan, a peer-to-peer loan could be a better option to pursue. Here’s a brief introduction to the lending model, and how it can support your company growth…
What is a peer-to-peer business loan?Peer-to-peer loans are a form of business lending, but the lenders are private investors, rather than banks. Companies and lenders are usually matched through an online platform – such as the WeOwn lending marketplace. While SMEs apply for a loan through the online platform, the platform provider isn’t involved in the provision of finance; your contract is direct with the person or people you’re borrowing the money from.
What are the benefits of peer-to-peer lending?There are many reasons why SMEs choose peer-to-peer loan services, the first of which is access to capital. Growing businesses often find it difficult to obtain loans through the bank, because they are younger and less established than large enterprises, which naturally makes them higher risk. Also, they often want to borrow relatively small amounts – less than €100,000 – which makes the rewards not work the risk in the bank’s eyes. Peer-to-peer loans tend to have a higher approval rate, because individual private investors are open-minded to lending to SMEs. They are more comfortable lending smaller amounts, and they see the long-term opportunity in helping dynamic brands to grow. There are other benefits to choosing a peer-to-peer business loan. These include:
- Quick, straightforward process – online platforms cut down the paperwork and processes involved in taking out a loan. For example, it takes minutes to apply for a loan through the WeOwn marketplace.
- Unsecured – unlike bank loans, which often need to be secured with business collateral, SMEs can borrow money through an unsecured peer-to-peer loan.
- Better deals – slicker processes mean lower fees, and private lenders can set preferable terms and interest rates compared to mainstream bank loans.
- Hold onto equity – unlike crowdfunding, peer-to-peer loans do not require SMEs to give away equity in order to attract business funding.
- Creating connections for the future – ultimately, private investors lend to companies they believe in. Who knows where that relationship may lead?