How does peer-to-peer lending work?
Peer-to-peer (P2P) lending platforms are run by financial service companies that act as intermediaries between investors and borrowers. These companies promote their platforms and charge fees to both groups.
In return for the fees charged, the company that operates a peer-to-peer lending site handles all the details such as conducting borrower background checks, distributing funds to borrowers, collecting payments and paying investors.
Matching investors with borrowers
One of the main benefits of peer-to-peer lending is its ability to match investors with a particular investment opportunity or a portfolio of loans. Depending on the platform, borrowers can be individuals or businesses seeking funds. Some peer-to-peer lending platforms specialise in making either only business or personal loans, while some make both.
Peer-to-peer lending for investors
Peer-to-peer offers investors can potentially get high yields from their investments over a short timeframe. Unlike banks and other lenders, companies running peer-to-peer platforms have low overheads and operating costs, which makes it possible to provide higher returns to investors. P2P lending platforms are classified as managed investment schemes. Companies running platforms are required to have an Australian Financial Services (AFS) licence and comply with the Corporations Act. Also, unlike bank accounts, the funds invested in P2P platforms are not insured, although some P2P lenders offer insurance protection or have a fund to compensate investors when borrowers default on their loans.
Due to the higher risk, peer-to-peer investing is recommended for sophisticated investors who have extensive experience with investing. Investors should also check ASIC Connect’s Professional Registers to ensure the lending platform has an AFS licence.
Peer-to-peer lending for borrowers
For small-to-medium business owners, peer-to-peer lending offers a way to get funds at a reasonable interest rate which can be lower than for credit cards and bank loans without having to go through the stringent application requirements of a bank. It’s also much quicker to get a peer-to-peer business loan compared to a traditional bank loan.
The application process includes paying an application fee, completing an online application and providing financial details. Your information is analysed for risk factors to determine your ability to repay the funds requested. Peer-to-peer lenders will check your credit report and score, so if you have any defaults or bankruptcies, you won’t qualify to get listed on the platform.
As part of this process, sometimes the applicant will be interviewed about the business. Based on this information, and if approved, the borrower will get an answer on the loan interest rate and amount of funds offered.
Once approved, investors using the platform can bid for the loan, which is called a ‘listing’ at this stage. Funds are made available to the borrower once the loan is fully subscribed (has received enough investment to cover the full amount of the loan). If the listing is not fully subscribed, some platforms offer the option to accept the bids (not covering the full amount of the loan) or extend the listing period.
Given this scenario, one of the risks of peer-to-peer lending is not getting fully funded during the listing period. If this happens, you could lose the application fee and not get the funds you were seeking.
If you do get a loan through a peer-to-peer lending platform, you will receive a credit guide which provides details on the credit provider and the role of the platform operator. The guide will also include contact details for making complaints and who you should contact if you have trouble making your loan repayments
Comparing peer-to-peer lending with other business finance options
If you are considering peer-to-peer lending to meet your business finance needs, you will want to look at all the options. Things to consider are the timeframe for getting funding, fees, interest rates and the risks involved. In addition, determine what the APR (annualised percentage rate) is to compare it accurately with other finance options.
You can learn more about marketplace lending on the ASIC website.
If you need a finance option that’s quicker than peer-to-peer lending , Moula offers unsecured business loans. The application process is simple and approval is determined within 24 hours. Also, check out our business loan calculator for an estimate or principal and interest repyaments.
