Peer-to-peer lending is one of the fastest growing lending industries in the UK. It offers compounding benefits not only for the borrower but also for the lender. A peer-to-peer lender can receive multiplied repayments after years. However, it is important to determine the rate of return in P2P lending.
Most of the people borrow money from their loved ones (peers) to fulfil their personal needs. People fear getting big loans from the peers because the chances of losing a relationship in this type of loan are relatively high. However, some people take peer-to-peer loans for business also. The capital of business loan is definitely higher than the personal loan.
Benefits of P2P Loan for Business Investment
- The borrowers can research the market and obtain as high amounts of loans as they require.
- The P2P borrowers may offer shared equity ownership to reduce the interest rates.
- The borrowers are freed from the stress of returning the loan amount. However, remember that the new FCA rules offer high protection to lenders and borrowers. Ideally, the borrowers should get free monetary advice from Money Advice Service before finalizing a loan contract.
- The interest rate of P2P loan is mostly lower than other loans.
- The borrowers can request to reduce the interest but the final interest amount depends on the willingness of the lender.
- Other forms of business investments are focused on high-return businesses. The borrower can obtain low amount of P2P loan while utilizing the savings.
- P2P loans are useful for covering up the extra costs of the business. People with small capital can use these loans to establish large businesses.
Risks in Taking P2P Loan for Business Investment
The most important risk of P2P loan is of losing the relationship. The borrower does not offer equity ownership to the lender, which is why, the borrower is obliged to return the money within loan tenure. If the borrower does not return the money, it will not only lead to the loss of a relationship but it will also cause legal complications because FCA provides consumer rights to P2P lenders also.
Venture capitalism and angel investment are other popular types of business investments. Following is a precise comparison of these investment types with P2P lending.
Peer-to-Peer Loan and Venture Capitalism
Venture capitalism is a private equity based business financing loan. Different firms operate as venture capital firms. These firms offer capital to start-up businesses. The businesses return the capital in the form of business equity. These firms are commonly known as high-risk portfolio firms. The business equity that venture capital firms obtain is the ownership stake.
The venture capital companies operate in two ways. Firstly, they offer capital for a fixed tenure. The small business with high potential of growth offers ownership equity throughout these years. The venture capital firms earn increased share and stock prices with increased ownership equity. The growth of small business could be based on the number of employees or market expansion. The small business returns the money after the fixed tenure and the venture capital firm withdraws the ownership equity. The contract finishes here.
Secondly, the venture capital companies obtain ownership for the lifetime of business. In this type of contract, the small business does not return the money. Instead, the small business provides ownership equity or sum of small ownership equity and small percentage of profits to the venture capital firm.
The stock equity of a starting business is already low in the market. In venture capitalism, the small business shares the equity, which further decreases the stock equity of small business in the market. Secondly, the small business needs to establish within the loan tenure and return the money after the loan term.
In peer-to-peer lending, the borrower is the only owner of the small business. The investor gives money as a loan and therefore, the borrower is not responsible to share the ownership equity or include the investor in decision-making process.
Peer-to-Peer Loan and Angel Investment
Seed investor, informal investor, private investor, and many other terms are used for angel investors. The concept of angel investment is a little different from venture capitalism. Some people work as angel crowdfunders, who collect money to invest in a business and get ownership equity shares. Angel investment is a good option but its drawbacks are similar to those of venture capitalism. In angel investment, the ownership equity also grants a right to vote to the investor. The shared equity may drop after withdrawing the investment.
The Financial Services Compensation Scheme
The Financial Services Compensation Scheme is a government-aided deposit protection scheme. The service offers protection of the loans borrowed from the registered credit unions, banks and building societies, pensions, business investment funds, mortgages, and endowment funds. The protection is provided up to £75,000 deposit. However, the Financial Services Compensation Scheme does not offer protection for the loans obtained under P2P lending system.
P2P Consumer Protection
The international financers want P2P lending and crowdfunding to succeed in the UK. However, a major P2P lending case provoked high-end investigation in July, 2016 according to Forbes. The Financial Conduct Authority introduced new consumer protection rules in 2014 for the borrowers. The February 2015 report of FCA considered monitored regulation of loan-based crowdfunding platforms and investment based crowdfunding platforms. The new rules are not applicable on stock market.
This report claims that equity-based crowdfunding has increased by 201% in 2014. A majority of the P2P borrowers included in the survey report claimed that they don’t use more than 68% of the fund. They put rest of the fund in the savings. FCA will supervise the P2P lending market with critical approach and monitoring. The new rules offer adjusted protection for both, borrowers and lenders of peer-to-peer loans.
You can get further information, tips, and ideas about P2P lending and other investment loans by visiting Quiddi Compare. You can also compare the rates and maximize your savings here.