Do you need funding for the next step in your business, but the traditional methods of funding aren’t possible? Then peer-to-peer lending may be an option. This type of lending is between two individuals where one wants to grow their business and the other wants to diversify their investment portfolio. In this article, we will look at what peer-to-peer lending is and its pros and cons.
What is peer-to-peer lending?
Peer-to-peer lending (P2P lending) involves a borrower and a lender. It is usually a digital platform which facilitates bringing these two parties together. The borrower is a business who requires a loan for their business and the lender can be a private investor which is an individual, business or institution. The lending takes place on the platform and depending on how the platform operates the investing could be into one business or spread through a variety of businesses. The rate for lenders and borrowers is lower than traditional lending methods and there is normally a quicker decision-making time. Peer-to-peer lending may also be called debt crowdfunding or loan-based lending.
What are the pros and cons of peer-to-peer lending?
The benefits of peer-to-peer lending are:
- It is accessible to many: Borrowers have access to different types of lenders and financing types, and some may not need security for you to take out a loan. There are also different levels of risk for lenders.
- The interest rate is lower: P2P lending may offer borrowers a competitive interest rate and lenders may get a favourable rate as well.
- Quick and convenient: As you enter all your requirements onto a platform and then these are analysed. From this point, you can get a quick answer whether your request is possible or not.
Now that we have looked at the benefits, what are the drawbacks of P2P lending:
The first drawback of P2P lending is that borrowers may not pay their loan back and this could lead to a loss on the lender’s side. Next, the regulations and protections offered by traditional lending methods may not be in place for P2P lending and these regulations and protections may vary greatly from platform to platform.
Lastly, these platforms may charge transaction or subscription fees which will add a cost to your lending or cut into your potential returns as an investor.
What is the P2P lending environment like in South Africa?
In 2013, P2P lending was heating up in South Africa with many P2P lenders available but then it seemed to fizzle out a bit. But recently a new player entered into the P2P lending play field who is working on reigniting P2P lending in South Africa and they are FunderJet.
How to choose your peer-to-peer lending platform?
There may be many different peer-to-peer lending platforms and you need to do your research first before you choose the one to go with. Here are some steps to follow:
- Do thorough research: As with any financial decision being made in your business, you need to do thorough research to ensure the platform you choose is the right one for you. You need to look at reviews, rates and fees and the track record of the platform.
- Register on the platform: When you have chosen your platform, you need to register on the platform.
- Smarten up your profile: Your profile is what the investor will look at before choosing to lend you money. You need to make sure it is well put together and represents your business well.
- Enter your loan request: You will complete a form with your loan request.
- Wait for approval: After you have put your request forward, the platform will need to approve your loan request.
- Get the funds: After the approval of your loan request, you will get the funds put into your business account.
- Pay back your loan: This is probably the most important step and that is to pay the loan back.
We hope this helps you to better understand peer-to-peer lending and may you go out there and build an empire you can be proud of.
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