Is Peer-to-Peer Lending a Safe Option?

Last post: Jan 21, 2019

Peer-to-Peer lending is a fast and increasingly mainstream method of obtaining business funding. This type of lending works by cutting out the middle-man (the banks) and directly connects a lender and a borrower.

Peer-to-Peer Lending (P2P) is a quick and increasingly mainstream method of obtaining business funding. This type of lending works by cutting out the middle-man (the banks) and directly connecting a lender to a borrower.

Is P2P a safe option?

Thanks to a variety of lending platforms, such as Funding Circle and Lending Crowd, P2P lending is a relatively safe option that has become a popular choice for many investors and borrowers. Attractive returns can however seem too good to be true, so it's important to look at the risks/benefits it may pose to lenders and borrowers.

Benefits for Lenders

  • Lending platforms are setup to be easy-to-use and can guide you along the way: Many of the larger platforms are fairly easy-to-use for newcomers and offer the support and guidance that you may be looking for.
  • Business that you lend to have been thoroughly checked: Lending platforms tend to have high expectations when it comes to the credit history and trading of the businesses on their platform, therefore regular checks are carried out. This ensures that, although not 100% secure, your money is being lent to creditworthy businesses.
  • You can choose how you invest: Many platforms allow you to choose how you invest your money, from high-risk options with great interest to low-risk options with slightly smaller interest. This gives you more control over what happens with your investments, with some lenders allowing you to even choose businesses directly.

Risks for Lenders

  • You are not protected by the FSCS when lending: All of the money that you invest and put into a peer-to-peer lending platform is not covered by the Financial Services Compensation Scheme. This means that any compensation you'd normally expect from a collapsing bank or building society, does not apply to a P2P lending platform.
  • You might not make any interest at all: Investing can work for some but not for others, as with all investments, so it is important to prepare for any losses and defaults that could potentially occur.
  • It can take time to find the right borrower: Although you may already lent your money to a lending platform, it might take a while before a suitable borrower is found. This waiting time means your money may lay dormant without garnering interest.

Benefits for Borrowers

  • There's opportunities for low interest rates: Some lending platforms offer a 'bidding' strategy for investors in which they can bid to invest in your business depending on the interest rate. This means that you pay the lowest interest rate possible for you, based on the average bid from investors.
  • Funding can sometimes be obtained more quickly: Unlike other business loans with traditional banks, you can often withdraw funds on the same working day of approval and completed paperwork. This makes obtaining your funds a seamless process.
  • Usually Unsecured: P2P lending is for the most part unsecured which can make borrowing money a little more comfortable.

Risks for Borrowers

  • Interest rates are often higher: Although there are opportunities for low interest rates, borrowing from a P2P lending platform can often be more costly due to the lucrative interest rates they offer to investors.
  • An open platform puts you at risk of exposure: Although some platforms do not state what business is obtaining funds to their investors (closed platform), open platforms put you at risk of exposure to potential customers. Having others know you are borrowing could be a benefit of exposure or a risk of reputation. It is something to consider when going through a more public lending platform.
  • Some Terms & Conditions prohibit you from borrowing elsewhere: Once you've borrowed from a P2P lending platform, you may be prohibited from borrowing money elsewhere in the future whilst still repaying. This could limit growth potential of your business if you are unable to increase your funds.