Obtaining the best funding solution, best suited to each individual company’s need, is challenging.
With 30+ P2P platforms, each having a different credit appetite and each offering different options depending on whether you need a loan or working capital finance, there can be a confusing array of possibilities.
It isn’t just about choosing the right platform or the right product, but about getting the right deal that is right for you.
It is also about understanding all aspects of the process, particularly with regard to fees and repayment charges.
P2P lending comprises an online platform that connects investors with borrowers, in return for a fee.
These alternative lenders compete with mainstream lenders such as challenger banks, as well as high street banks.
The sector continues to expand rapidly with £4.2bn of loans forecast for 2017.
Loans from £5K up to several £M can be arranged.
Institutional money continues to back the sector, meaning many platforms now underwrite/fund their own deals. Revolving Credit Facilities (overdrafts) are also now available.
WHY IS P2P AN OPTION?
High street banks are not suitable for everyone.
They tend to have quite prescriptive lending criteria, which means that many SMEs will get rejected even if they are perfectly eligible for a loan. (See our article ‘What to do when the Bank says No" in our Newsfeed).
P2P lending is often a viable alternative as the company’s individual circumstances are considered; it isn’t just about meeting defined credit scoring parameters.
A survey by the British Business Bank for 2015/16 found that 100,000 small businesses were rejected for loans by mainstream lenders – equating to £4bn of missed opportunity finance.
P2P can provide more specialist finance solutions more quickly and with better service. P2P platforms are small and nimble making them much more flexible, reducing costs and making the process faster and simpler.
Whilst banks can take several months to complete a proposal, typical turnaround for a simple P2P proposal ranges from a few days to 4/6 weeks.
There is a strong sector emerging for fast deals up to £250K, but these tend to be more expensive and should be seen as the first step towards a longer deal.
The sector arguably has better appetite than the banks at present for MBO/MBI deals, property development finance and general working capital lending.
While criteria varies from platform to platform, P2P loans are often more suitable for businesses that are more established. Although there are some options available, Start-Ups are difficult, as are challenging turnaround situations.
There is a wide variation between platforms in the level of due diligence and security required, but most proposals can be accommodated if they are reasonable.
P2P loans are rarely cheaper than going to a high street bank – it really depends on the individual facility, risk and platform.
Typically interest rates are between 8-15% (as at July 2017) though we are seeing some downward pressure on rates as more institutional money enters the sector.
These rates are competitive bearing in mind the other benefits they can offer such as flexibility of proposal and speed of decision, and banks will continue with conservative credit policies for the foreseeable future.
Business finance should also be a progression through a number of steps: P2P funding is an enabler, often acting as the first step in a longer finance journey. It allows you to get the deal done so the business can reap the benefits quickly, then move on to mainstream financing options.
STRATEGY & TACTICS
We often advise clients to run a parallel funding strategy – apply through your bank but at the same time, work with someone like Ludgate to have a back-up solution.
In many cases, we see banks prevaricating over a lending decision; we have seen some of them take 9-12 months to make a decision for an existing client.
P2P can be quicker than this, so another strategy is to use alternative funding to get the initial job done, then move to more mainstream funding later, at your leisure, when you can take your time to do the best deal. We tend to build this progression strategy in with all our clients, and careful initial structuring means an easier switch to the bank at a later date.