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Person-to-business crowdfunding: What you need to know

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With business lending continuing its downward spiral, UK businesses are considering alternative sources of finance to fund their growth.

For SMEs that don’t want to part with a share of their company, peer-to-peer lending (P2P), or person-to-business lending (P2B), could be the ideal solution.

What is P2B lending? 

In the world of P2B lending, individuals seeking a better rate of interest on their cash lend to companies that need to borrow to expand their businesses. In effect, the “crowd” replaces the banks as a source of financing. 

There are other advantages to borrowing through a P2B platforms, such as our own. Some can approve loans within 72 hours of receiving the company’s application. Companies can borrow for up to five years for one arrangement fee, with no costly annual renewals. There are no covenants, but a debenture will be taken over the company’s assets. Loan agreements are just four pages and written in straight-forward English. 

How does it work?

There are no intermediaries with P2B lending. Companies can register direct and, after providing information about their business and confirming that they have three years’ of filed accounts, their application can be processed.

Once a company’s loan is approved, a credit rating is attributed to it, providing guidance to lenders. It is then auctioned on the site.

The crowd sets the rate that the company will pay on its loan, with each lender included in the loan guaranteed the rate of interest asked for. Thus, if a company wants to borrow £50,000 and lender A asks for 5.5 per cent and lender B for 6.5 per cent, the company will pay 6 per cent for its loan, with lender A getting 5.5 per cent and lender B 6.5 per cent.

The platform makes money from arrangement fees, which tend to be considerably lower than those charged by the banks. Lenders are also charged an annual fee, usually of around 1 per cent.

What’s in it for businesses?

Bank lending has been falling since the financial crisis, with the most recent statistics by the Bank of England (BoE) showing yet another slump. In the month of January alone, lending to SMEs was down £300m.

Even the BoE’s flagship programme Funding for Lending has been unable to inject cash into SMEs.

Alternative finance, such as P2B, offers small businesses a way to bypass the banks. With a multitude of platforms available, it is also a more democratic means of finance.

What’s in a platform?

Your choice of platform is crucial, particularly in terms of attracting lenders – and funds.

The UK P2B marketplace is dominated by a handful of platforms, but new competitors are emerging. Our own platform will focus on small and medium-sized enterprises. Platforms with a big market share or visibility in the media are more likely to succeed in attracting lenders.

Beyond size and visibility, consider the type of protections the platform has.

Is it safe?

From next month, the Financial Conduct Authority (FCA) will begin to regulate all P2B businesses. Although the Financial Services Compensation Scheme will not cover P2B, each platform is required to have additional funds set aside to underpin their business.

The FCA regulations will create an additional safety network for both lenders and borrowers. But remember to read the small print, for each platform will differ in its offering. 

For SMEs that are struggling to access finance, P2B is a godsend – it means more accessible finance, lower rates of interest, and a more democratic finance sector.

Nicola Horlick is CEO of P2B platform Money&Co.

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