Last year in the UK, peer to peer lending reached new heights – lending £3.2bn across 2016, which is up 39% from the year before. Crowdfunding and P2P platforms have been around for over a decade now, and are showing no signs of slowing down. But what has made them so popular, especially with start-ups, small businesses and medium sized enterprises?
There’s a number of factors which have contributed to the boom of alternative finance solutions, such as peer to peer lending and crowdfunding. The uncertain global economic market has definitely played a part, as the recession impacted banks and traditional lenders. Also, consumers and now much more comfortable using the internet to apply for loans and transfer money, which opens up a wealth of opportunity for the financial sector.
What is Crowdfunding and P2P Lending?
They are often grouped together but there is a distinct difference between crowdfunding platforms and peer to peer lending. In both cases, it is usually a number of investors who will contribute to the amount you borrow.
P2P is very similar to a business loan from a bank, except that you’re borrowing off real people. You’ll pay back interest to your investors in return for the borrowed finance, and it’s a flexible way for companies to receive a fast cash injection.
Crowdfunding is different because you will receive money from a group of individuals or organisations to make up the amount you require. You will then need to offer your backers some sort of reward – for start-ups this could be a perk such as a discount or free product. Alternatively, if you’re looking for big investors then you may need to offer equity in your business or a profit share – think of Dragon’s Den.
Usually, crowdfunding is a great option for entrepreneurs and start-ups while peer to peer lending is more suited to established businesses.
Why is it so Popular?
These types of alternative finance are now mainstream because it is so difficult to get a traditional business loan from a bank. Lending has decreased for years now, making it impossible for people to get their business ideas off the ground. Without personal investment, entrepreneurs are left with no choice but to pitch their idea online to investors. Even established businesses with a strong trading history can struggle to be accepted for financial help from a bank.
Another reason why peer to peer lending is attractive is the generally low interest rates. If you apply for P2P through a financial broker, they will look at all offers and all interest rates and offer an average interest rate. Larger financial institutions have less competition so don’t offer the best deal.
Ready to see what all the fuss is about? Contact us to find out more about P2P or crowdfunding.