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Peer-to-peer lending, 
or peer-to-business lending, is hogging the headlines in the finance section of the papers right now because of its common sense approach to lending and borrowing.
At the heart of p2p, or p2b as they are becoming known, is the notion that everyone gets a better deal. Against a national backdrop of low interest rates for savings and a banking culture that has flipped 180 degrees and now views risk in a completely different light to previous years, it’s hardly surprising that people are looking for alternatives.
Supply and demand
The market is created by connecting individuals or businesses looking to borrow money with individuals willing to lend money. It’s an age old supply and demand ‘dating’ service.
For many businesses, securing credit is one of the toughest parts of running a business in 2012 and everything points towards 2013 being similarly difficult. Being able to acquire finance through p2b lending is helping businesses grow in a challenging environment and they are happy to pay lenders a rate of interest that outperforms their savings accounts.
Lenders typically lend small amounts to many businesses at interest rates they feel represents their risk. This could be anywhere from 6-15% depending on the individual’s risk appetite.
A busy year for peer-to-peer lending
The Treasury last week announced that peer-to-peer (P2P) lending will fall under the Financial Conduct Authority’s jurisdiction and will be subject to regulations expected to come into force in April 2014.
This is without doubt great news for this emerging sector of the market and for innovation in the financial services industry in general.
Currently P2P and peer-to-business providers, such as rebuildingsociety.com, are unregulated operators in a predominantly regulated UK financial services market. Whilst on the one hand this would seem to be a positive, it actually makes life incredibly difficult for us, particularly when competing against regulated investment products.
In his blog out yesterday (12/12/12), Robert Peston, commented on the findings of a McKinsey report that declared Britain is suffering from an investment crisis.
Apparently rates of investment in UK businesses have fallen below the forecasted rate by as much as a third in 2012.
You can’t exactly blame the investors, as Peston points out:
“A good deal of the investment squeeze is the poisonous legacy of the recklessness of banks in the boom years, which lent unprecedented and ludicrous sums to over-indebted property developers.”
Investors will certainly be cautious about investing in the same products as they did pre-crash for fear of a repeat, but there are simply new ways of making private investments that are growing rather than falling.
If you’re not comfortable with the notion that your money could be lost or the chance that your cash might be worth less than when you started, then you should stick to savings accounts.
However, if you’re the type of person who wants their money to work harder and be worth more, then you should consider shares or the peer-to-peer (P2P) or peer-to-business (P2B) lending markets.
This is a short compare and contrast between the two markets.
Returns
Both markets offer higher returns than savings accounts, but neither are covered by the FSCS – that’s the most important point. However…
Interested in peer to peer lending but not sure where to start?
You’ll find this video tutorial useful. It walks through the lending process as well as the different bidding methods open to lenders. Once you’ve had the chance to read the business profiles you can choose which businesses to lend to, how much and at which interest rate. If the borrower accepts, you’ll enter into a loan arrangement with many other lenders. Each month you’ll receive capital repayments and interest. This can be withdrawn or reinvested into other businesses.
Please help other people learn about peer to peer lending, by sharing this video.
Introducers who refer clients to the site should familiarise themselves with the process in order to offer the best advice.
Investment advisers can now earn a one per cent introducer fee when they refer clients who lend a minimum of £2k to businesses listed on rebuildingsociety.com, the peer-to-business lending platform.
Peer-to-peer and peer-to-business lending have emerged as growth markets as cash-rich individuals and advisers have recognised the value of lending to people and companies with the means to repay loans, as ISAs, pension funds and savings account returns have dwindled in the recession.
To date around £360m has been lent through the market* where lenders spread their risk by lending small amounts to many businesses that meet their risk appetite.
Managing director Daniel Rajkumar explains: “Lending to businesses is a market gathering momentum as it’s a short to medium term investment that adds diversity to an investment portfolio with high returns.
“Lenders on rebuildingsociety.com are lending money at rates in excess of ten per cent, which is a rate businesses are prepared to pay as they can’t access the funds through banks, despite being profitable and mature.
“If advisers have clients sitting on cash in low interest savings accounts, they should consider lending to businesses through rebuildingsociety.com as a way of better deploying that capital and this incentive shows we’re prepared to pay for their trusted advice as we build the market.” (more…)