Member Article

Is it time to look at peer-to-peer loans?

For all the talk of economic recovery, there’s evidence to suggest that many small businesses are still having difficulty accessing finance via traditional means.

As well as anecdotal stories, the government’s quarterly Trends in Lending reports have shown that for the last five years, banks have almost consistently been lending less and less to small businesses.

The difficult conditions may make submitting an application for a business bank loan feel like buying a lottery ticket, but small businesses that are successful certainly don’t get the finance they need by luck alone.

Applications require time and effort to put together, as banks demand business plans, personal asset statements, cash-flow forecasts, cost break-downs and much more besides, before they’ll even consider loosening their grip on finance.

The application process from start to finish usually takes around three- frustratingly long - months. If an application is unsuccessful, small businesses are left with little advice about where to turn next, as the majority of banks won’t refer applicants elsewhere.

A thriving alternative finance industry

These restrictive conditions have allowed the alternative finance industry to thrive, and leading the revolution are peer-to-peer lenders Funding Circle, the world’s leading marketplace for business loans.

Funding Circle expects businesses to borrow £300 million directly from its 30,000 plus investors this year - up from £129 in 2013.

The Government-backed British Business Bank is just one of the investors, signalling a vote of confidence in the alternative financing model.

Applying for finance through a peer-to-peer lending platform provides small businesses with more than just fast access to finance; it provides, in the words of Tom Williams from Ark Consultants, “a fantastic feeling knowing that a whole group of people think my business is a good idea”.

The confidence boost a small business receives from this type of funding may be a rather abstract benefit that more practical business owners look past, but there is no overlooking the substantial time that can be saved by taking a peer-to-peer loan.

From submitting an application to receiving the loan, small businesses can receive finance from a peer-to-peer lending platform such as Funding Circle in less than two weeks. For businesses that can’t wait around when opportunities present themselves, peer-to-peer loans offer a clear advantage over bank loans.

Take, as an example, adventure experience provider Saber Powersports. In May 2014, the business took out a loan to help purchase a new jet engine. Had the firm gone to a bank for a traditional business loan, they may well have missed out on the busy summer period – the key time for their operation - while waiting for the loan to be accepted.

The other alternative financers

While peer-to-peer lending is certainly the most significant alternative source of funding, it’s not the only one.

Invoice factoring, which allows business to access their clients’ unpaid invoices for a fee, has also seen growth in the past few years.

For small businesses looking for short-term, low-value financing, this can be an attractive alternative to using business credit cards.

Meanwhile, other small businesses looking for larger investments, as well as business input, may look optimistically at the rise in the opportunity for finance from ‘angel’ investors.

Both financing solutions have their pros and cons that will make them more or less suitable depending on the business.

Indeed, even Funding Circle isn’t the most appropriate source of funding for every business – applicants need two years of accounts and a turnover of at least £50,000, making start-ups and very young businesses ineligible.

The right capital for the right business

Ultimately the decision about which finance provider to use must be based on the needs of the individual business.

As the P2P Loan or Bank Loan infographic illustrates, however, small businesses that fail to explore peer-to-peer lending may be putting themselves at a competitive disadvantage by waiting around for banks to stop dragging their feet.

To find out more about the difference between peer-to-peer loans and bank loans visit the Funding Circle blog post.

This was posted in Bdaily's Members' News section by Simon Malia .