What is P2P lending? Read this article to learn how P2P lending platforms work and why this online lending service could help you level up your SMEs today.
In recent years, global access to the internet has grown substantially, and this growth has driven new innovations in the financial industry. Among the modern advances are peer-to-peer (P2P) lending platforms.
P2P lending has become an important resource for small businesses, especially at important stages of growth in the beginning of business. If you’ve been wondering if P2P lending is a good fit for you and your business, check out this article. We’ve put together the most important information about P2P lending that you need to decide if P2P lending is a good fit for you, so you can take the next steps for your business..
What Is P2P Lending?
P2P lending is a financing alternative where online services facilitate lending to SMEs. It’s different from getting a loan from a bank, because P2P lending platforms do not loan money themselves. Instead these platforms connect investors to potential borrowers and create opportunities for borrowers to connect with a wide audience of investors. No financial institutions act as official intermediaries. Most P2P lending loans are unsecured personal loans. Here’s a bit more about how it works.
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How Does P2P Lending Work?
Online P2P lending platforms like mintos, Bondster, and Debitum easily facilitate peer-to-peer loans. Here’s what happens:
- The aspiring borrower completes an online application.
- An algorithm assesses the application to determine the applicant’s credit rating and lending-associated risk and then assigns the applicant the appropriate interest rate.
- Once their application is assessed and approved, investor options become available to the applicant.
- The applicant evaluates their options and chooses one.
- The applicant pays periodic interest payments (usually monthly) and repays the principal amount at maturity.
The Advantages of P2P Lending
Investors and recipients can both benefit from P2P lending.
- Higher returns to investors
Investment site Money Under 30 says, “Many peer-to-peer investors report annual investment returns of greater than 10%. That’s hardly surprising—typical loan rates offered by the platforms range between 6% and 36%.” - More accessible source of funding
For certain borrowers, P2P lending can be an easier option when it comes to finding reasonable loan terms.
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- Lower interest rates
Borrowers may find P2P lending interest rates lower than those they access through traditional financing sources.
- Lower interest rates
The Disadvantages of P2P Lending
For others, P2P lending just isn’t the best option.
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- Lack of insurance protection
P2P loans aren’t FDIC insured, so investors may be out of luck if something goes wrong.
- Lack of insurance protection
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- Limited regulation
Regulations vary. Platforms will have some requirements to meet, but other regulatory laws do not apply to P2P lending.
- Limited regulation
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- Credit risk
P2P lending platforms provide risk assessment, but it is a nontraditional option for borrowers with low credit ratings.
- Credit risk
P2P Lending Is on the Rise in Southeast Asia
The numbers show P2P lending is proving a profitable option for plenty of lenders and borrowers. A finding by Transparency Market Research suggests that “the opportunity in the global peer-to-peer market will be worth $897.85 billion by the year 2024, from $26.16 billion in 2015. The market is anticipated to rise at a whopping CAGR of 48.2% between 2016 and 2024.” The opportunity for borrowers on P2P lending platforms is growing.
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Who Does P2P Lending Help Most?
P2P lending can be life changing for many. Its impacts are especially significant for people who are totally new to credit or, for whatever reason, have limited financial records. It’s also a meaningful option for medium or small business owners looking to grow their business.
Interestingly, P2P lending is often a reliable option for women borrowers around the world. A study shared on livemint.com determined that, “There has been a 430% rise in women investors in the P2P lending space in the financial year 2022 compared with FY21. There has also seen a 150% increase in women borrowers on the borrower side y-o-y basis.” The P2P lending platform LenDenClub released the study, based on data from over 20,000 women investors and borrowers in P2P lending from April 2021 to March 2022.
Is P2P Lending Good for Your SME?
Why should you consider P2P lending for your small business? DBS.com reports that, “According to Kelvin Teo, Co-founder of Funding Societies, P2P lending platforms can offer SMEs an additional avenue for loans, and afford more flexibility for issuing of loans compared to banks as they target a wider customer segment.”
For new SMEs, P2P lending platforms can serve as a practical alternative to conventional loan sources. However, once a small business hits a certain level of growth, it is usually necessary to count on banks to bring the company to the next stage of maturity.
Wherever you are in your business journey, it’s great to know what options are out there, how they benefit you, and where to look when it’s time to grow. If you’re curious to learn more about how P2P lending might be a fit for you, check out the local and global platforms that match your interests. Don’t wait to take the next step for your business.
For more information, contact Trustana here.