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?
There are major benefits for investors too; lower operating costs mean higher potential returns, and investors can choose to lend to as many companies as they want, diversifying their portfolio and managing risk in the process.
How does the peer-to-peer lending process work?
Every platform has a slightly different model, and WeOwn has designed our marketplace to be as quick and straightforward as possible.
SMEs wanting to borrow money must first complete a short eligibility check, to make sure they meet our basic lending criteria. They then complete our online application process, which includes an independent credit check through one of our partners, and only takes a few minutes.
With their application completed and approved, companies post their profile on our digital marketplace, where a pool of investors is ready and waiting to view the latest opportunities. If an investor likes what they see, a match can be made instantly; however, we aim to complete the matching process in 7 working days.
While the exact terms of the loan are arranged between the company and the lender, the WeOwn platform manages all the communications, administration and security protocol needed to ensure that money changes hands as seamlessly as possible. And best of all, there are no fees for SMEs to pay until they’ve met the right match.
How does peer-to-peer lending support SME growth?
Access to finance is a critical issue for SMEs; 3 in 5 small businesses have experienced cash flow struggles at some point, and it remains the number one reason that companies fail.
Peer-to-peer business loans counteract this problem by offering an accessible, affordable funding opportunity when companies feel let down by their bank. And with a simple online application process, capital can be raised in days – not weeks.
Altogether, this means that thousands of European SMEs can gain rapid access to business finance when they need it most, taking their business to the next level. And private investors get to support their journey, generating potential profit opportunities in the process.