7 ways peer-to-peer lending is revolutionizing business financing
Image by Pete Linforth from Pixabay
In the digital age, the rise of alternative financing options like peer-to-peer lending (P2P) has transformed capital raising. P2P lending has emerged as a popular method for funding, revolutionizing business financing globally. Here are 7 ways peer-to-peer lending is changing the face of business funding.
1. Increased access to capital
Peer-to-peer lending platforms connect businesses needing funding with a larger pool of lenders. Borrowers access the loans they need and make monthly payments to the platform, which then distributes the interest-bearing loan repayments to investors.
This access to capital through simply structured loans is good news for small and medium-sized enterprises (SMEs). It is particularly beneficial for startups that would not otherwise qualify for a loan from a bank or conventional loan institution.
Many businesses owe their success to humble beginnings built on determination and backed by successful crowdfunding campaigns. Several of them have gone on to become highly successful billion-dollar companies, such as Oculus Rift, Peloton, and MVMT Watches, to name just a few.
2. Lower interest rates
P2P lending is a loans-based type of crowdfunding, offering more accessible financial opportunities for both borrowers and lenders. Peer-to-peer lending platforms like Swiss-based Maclear connect these lenders and borrowers online without a financial intermediary.
Thanks to the lower operating costs of such platforms vs traditional banks, borrowers enjoy reduced interest rates while investors enjoy innovative and profitable investments.
Simply put, borrowers pay less interest on P2P loans than they would through most banking institutions. This reduces their overall costs and allows them to grow and be more profitable. Yet the interest lenders receive on their P2P loans are typically higher returns than they’d get from banks’ savings accounts.
3. Simplified loan approval process
There’s far less paperwork and bureaucracy involved in obtaining a loan through a P2P lending platform, than traditional loan institutions. Reduced bureaucracy and admin means simpler decision-making and quicker distribution of funds. Indeed, the entire loan approval process is streamlined.
Borrowers create their profiles on a P2P lending platform. They submit loan applications online, detailing their funding needs (amount needed and what it’s for). The platform assesses their creditworthiness and if approved, lists the loan requests.
These listings are accompanied by relevant information that helps investors match their lending criteria to borrowers’ creditworthiness, loan terms, interest rates offered, etc. They can invest in single or multiple loans. Some P2P platforms differ slightly in their methods, but the basic process is the same.
4. Diverse loan options
Borrowers don’t all have the same business loan needs. They could be starting a new business, or expanding an existing business. Different loan options are necessary to cater to these various business scenarios. P2P platforms met this need.
They offer a wide variety of loan options, for example, short-term loans, working capital loans, and more. On a P2P platform, the loan terms can also be customized to fit a business’s specific needs.
Everyone from entrepreneurs in need of seed capital to small businesses looking for funding to scale and grow their brand, gets the help they need. They also benefit from loan terms that they can afford to abide by. Savvy financial decisions about funding make it easier for startups to achieve sustainable growth.
5. Enhanced transparency
P2P borrowers include a wide variety of lender profiles, from tech startups to plumbing businesses wanting to turn their pipe dreams into reality. P2P lending platforms provide clear and detailed information about all their lenders, their unique risk profiles, and loan terms.
This is in stark contrast to the often opaque processes of traditional lending institutions. And it is this clarity and transparency that instils confidence in lenders. It also builds trust between borrowers and lenders.
This makes applying for P2P loans more attractive to borrowers who have had negative experiences with banking institutions. It also makes investing in P2P loans more appealing to lenders, even to inexperienced investors.
6. Opportunities for less-risky investment
P2P lending platforms do more than provide borrowers with easier access to funding. They provide investors with opportunities for reliable income streams, through interest earned on their contributions to loans. As individual lenders, their contributions are pooled and used to finance loans on the platform.
This type of investment allows individuals, even those with less investment experience, to make investments with lower risk and higher diversification. Investors are therefore assured of moderate to high but stable gains and more investment opportunities.
7. Innovation and competition
P2P lending helps borrowers gain access to much-needed startup capital and offers lenders exciting yet low-risk investment opportunities. And as a bonus, P2P lenders know they are helping promising new entrepreneurs gain the funding they need.
This support of innovative small businesses has a positive impact on the overall economy.
According to the World Bank, small and medium enterprises (SMEs) account for more than half of formal jobs worldwide. By supporting emerging new businesses with P2P lending, you can promote innovation and drive the competition that leads to job creation and economic growth.
