Hustlers listen up!
Peer-to-peer (P2P) lending is a fantastic way for tech startup entrepreneurs to raise cash, and raise cash fast. Especially if you need a smaller loan to kick start your low-budget tech enterprise. All this P2P talk may seem a little new and confusing, but if you play your cards right you can access funding for great rates. And while there are of course risks involved there’s more risk… (keep this under your hat now) on the side of the lender than the borrower. More on that in a minute.
End of the borrower’s paradox
Since that whole crazy credit crisis nonsense a few years ago, a strange paradox has existed. People with money to save have had problems finding investments and places to put all that cash which will offer them good returns. And at the same time small business owners have had problems borrowing money. Eager lenders, and eager borrowers… but nothing happening!
The traditional middlemen – the banks – just haven’t been introducing the two sides well enough. They’re still (perhaps understandably) scared about lending out money, and they are also offering low interest rates to savers. Now another middleman has stepped in to fill the gaping hole the banks have left. The peer-to-peer (P2P) lending platforms are reintroducing savers with borrowers, and it’s all systems go once more!
The leading P2P lending platforms
In the UK, the leading platforms are Zopa, Funding Circle and Ratesetter, each allowing you to get the equivalent of a personal unsecured loan directly from an individual or group of individuals. The great thing is how fluidly these platforms match appetite for risk with borrowers of differing risk profiles. More risk and return-hungry investors will happily take on borrowers with lower credit scores and riskier profiles, because they get a higher rate. And those more risk-averse lenders will go with those borrowers with squeaky clean credit profiles. The important thing is it’s now up to the lender to decide, not a bank manager in the middle.
Why it’s less risky for borrowers than for lenders
As the borrower, it can do you no harm to apply for loans through these platforms. But of course, a word of warning, always take great care to read every word in the small print and carefully consider any such financial transaction. If you can’t keep up with a loan, you’ll end up in hot water!
When you apply, you’ll be offered an interest rate to borrow at, which will include charges and will be higher or lower depending on your credit history, the timeframe of the loan and how much you want to borrow. The middleman costs are typically quite low because the platforms are internet-based and have low overhead fees. And because competition is fierce. But overall the risks are higher for the lender than for you. This is mainly because when saving with a bank, their money is covered by the Financial Services Compensation Scheme, which guarantees the first £85,000 if the bank goes bust. But P2P lending platforms are not covered by this, their money and loan is directly linked to you, not through some institution.
Of course, take the same care as you would with any loan
Defaults and late or missed payments will get you charges and notes on your credit file, as with any bank loan. Always be sensible! Unlike a bank loan you could get cash in a week or two, rather than months. And you can get it even with a less-than-perfect credit profile.
Here’s a nice infographic summing up some advantages of P2P lending for small businesses and intrepid hustlers like yourself;
And for more research, here are a few more articles on the pros and cons of P2P lending:
- Pros and cons of P2P lending
- Tips for P2P borrowers
- And some pros and cons from a lender’s perspective
Got any questions about raising cash for your tech startup with P2P lending?
Ask away! We’re here to help.