Peer to peer lending is an alternative funding source to benefit business growth

Peer to peer lending (person to person lending) is an alternative loan source for family business entrepreneurs seeking funding. In the current climate when banks are are more reluctant to make loans to start-ups, family businesses and entrepreneurs, peer to peer lending can be an attractive option for a family businesses.

By: Hitesh Khan/

Businesses which are seeking innovative financing solutions to grow their enterprise, should consider peer to peer lending.

According to Wikipedia, “The marketplace model of Person to Person Lending on the internet enables individual lenders to locate individual borrowers and vice-versa. This model connects borrowers with lenders through an auction-like process in which the lender willing to provide the lowest interest rate “wins” the borrower’s loan. The marketplace process may include other intermediaries who package and resell the loans, but the loans are ultimately sold to individuals or pools of individuals.

The “family and friend” model forgoes the auction-like process entirely and concentrates on borrowers and lenders who already know one another, as with two (or more) friends or business colleagues formalizing a personal loan. Whereas the primary benefit of the marketplace model is the “match making” aspect, the family and friend model emphasizes online collaboration, loan formalization and servicing.”

In both the peer to peer lending model and the family and friend lending model, the key is the formalising of the loan agreement.

In peer to peer lending among family members, the loan agreement between family members can be as simple as a promissory note. A promissory note is simply a written promise to repay a loan or debt. The promissory note includes the names and the under specific terms – usually at a stated time, through a specified series of payments, or upon demand.

Since peer-to-peer lending companies offering these services generally operate online, they can run with lower overhead and provide the service more cheaply than traditional financial institutions.

As a result, lenders can earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates, even after the P2P lending company has taken a fee for providing the match-making platform and credit checking the borrower.

Also known as crowdlending, many peer-to-peer loans are unsecured personal loans, though some of the largest amounts are lent to businesses. Secured loans are sometimes offered by using luxury assets such as jewelry, watches, vintage cars, fine art, buildings, aircraft and other business assets as collateral. They are made to an individual, company or charity.

The interest rates can be set by lenders who compete for the lowest rate on the reverse auction model or fixed by the intermediary company on the basis of an analysis of the borrower’s credit. The lender’s investment in the loan is not normally protected by any government guarantee. On some services, lenders mitigate the risk of bad debt by choosing which borrowers to lend to, and mitigate total risk by diversifying their investments among different borrowers.

Other models involve the P2P lending company maintaining a separate, ringfenced fund, which pays lenders back in the event the borrower defaults.

The lending intermediaries are for-profit businesses; they generate revenue by collecting a one-time fee on funded loans from borrowers and by assessing a loan servicing fee to investors or borrowers (either a fixed amount annually or a percentage of the loan amount). Compared to stock markets, P2P lending tends to have both less volatility and less liquidity.

Recently, DBS, one of Singapore’s biggest banks, said that they have inked a deal with two P2P lending platforms to boost funding options for SMEs, assuring that SMEs have alternatives at whatever stage of their growth.

In a statement, DBS said they will refer “smaller businesses that the bank is unable to lend to, to Funding Societies and MoolahSense. In return, the p2p lending platforms will refer borrowers who have completed two successful rounds of fund raising to DBS for larger commercial loans and other financial solutions such as cash management. To safeguard borrowers’ privacy, the bank and p2p lenders will only share information when they have obtained borrowers’ consent in advance”.

This collaboration is good news for SMEs as utilising p2p platforms for funding. They can expect to benefit from the wider amount of financial products that banks offer sooner than later, which will involve an opt-in exchange of information between the two entities aimed to facilitate the growth of SMEs beyond the startup stage.