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. You can borrow or lend money via P2p lending without having to deal with the intermediaries such as credit unions and banks. You decide for how long you want the loan, for what, as well as the amount you want to borrow.
Equally popular among the lenders and the borrowers, P2P lending curtails interest rates for the borrowers along with increasing the returns for the individuals responsible for supplying the capital. A peer-to-peer lender can also receive multiplied repayments after years. However, it is important to determine the rate of return in P2P lending.
In today’s world, already there are many platforms that are offering funding for loans to individuals with which they can finance new business initiatives such as for purchases of consumer goods, locomotive vehicles or purchase of computer software.
Peer-to-Peer Lending for Entrepreneurial Initiatives
P2P borrowers may offer shared equity ownership to reduce the interest rates. The interest rate of a 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.
The new FCA rules offer high protection to lenders and borrowers. P2P loans are useful for covering up the extra costs of the business. Hence, entrepreneurs with a limited capital supply can use peer-to-peer loans to fund their entrepreneurial initiatives.
When you apply for a P2P loan, it is usually because we need the money fast. The approval and granting of P2P loans is done in just a few hours. On the other hand, if you apply for a traditional bank loan, you need to give an explanation of why do you want the money. This does not happen with P2P loans. There are loans that can applied for without having to explain why we want the money.
However, with P2P lending, the lender has a disadvantage when it comes to equity ownership. Since the borrower does not offer equity ownership to the lender, the money has to be returned with the loan time window. Failing to do so 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.
By P2P lending you can apply for even business loans in the same way that if it were to request personal funding. The whole process is very similar involving the same steps. Everything works exactly the same way. However, for personal loans there are fewer documents required.
Venture Capitalism in Comparison with P2P Lending
Venture capitalism is a form of private equity based business financing loan. Several firms function as a form of venture capital firms. They offer start-ups with initial capital thus serving as engine-boosting firms. In return, they get a share of equity of the startup businesses.
The basic functions of these venture capital firms can be broadly categorized into two separate categories. Firstly, they maintain an ownership interest in the start up for the entire lifetime of the business. In this type of contract, the start up 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.
The second category involves lending capital for a fixed period window. The start up with high potential of growth offers ownership equity throughout this time frame, generally a period of several 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 once the tenure is over and the venture capital firm withdraws the ownership equity.
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.
What’s the Financial Services Compensation Scheme and What Does it Offer?
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 a maximum of £75,000 deposit. But, on the other hand, the Financial Services Compensation Scheme does not offer protection for the loans obtained under P2P lending system.
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