Crowdfunding and peer-to-peer lending

Many small businesses continue to face a brick wall when it comes to sourcing loans from traditional banks. This is leading more and more companies to turn to crowdfunding and peer-to-peer lending as a means of obtaining the funds that they need.

These platforms allow small and medium-sized businesses to obtain the money they need for a specific project without having to go down the more traditional, and often inaccessible, routes. There is also the added benefit that this method can provide a valuable marketing tool, offering a business the opportunity to show off its activity and potential for growth through its desire for funding.

In return, peer-to-peer investors receive a financial return derived from the interest paid on the loan, whilst those involved in equity-based crowdfunding receive investment rewards in the form of equity in a growing business. With reward-based crowdfunding, investors may receive products or hospitality, for example, as a reward for their support.

There is the opportunity for businesses to combine this sort of funding with finance sourced elsewhere to form a lending package, and the biggest companies involved in the field provide the security of being FCA-regulated. Some of the biggest crowdfunding platforms at the moment can be found at www.lendingcrowd.com and www.fundingcircle.com.

Crowdfunding can be a viable funding option for businesses that have a track record of at least a year to 18 months, and there is no doubt as to the growing popularity of the market. In 2012, a total of $2.7 billion was raised across the world as a result of peer-to-peer lending and crowdfunding, and that figure continues to rise. This has been helped in no small part by the start of Financial Conduct Authority regulation in April, 2014, which was asked for by the providers themselves and is proving effective in creating a stable and credible marketplace.

This form of funding offers security for the investors, with the largest platforms offering opportunities from credit-approved businesses, and it can eliminate both complexity and costs for companies when compared to dealing with traditional banks. Current lenders include individuals, private businesses, local authorities, the UK government, universities and various financial organisations.

The interest rates paid will normally have a lower limit and then be dictated by the investors wanting to become involved. At LendingCrowd, for example, February 2015 rates began at 5.95 per cent. There is usually the opportunity to refuse the loan if the interest rate is not satisfactory and, if it is, the process can be fast and simple compared to other lending methods. Companies will often also be offered the chance to repay the loan early without facing hefty fees or penalties.

If you’re interested in finding out more about crowdfunding or peer-to-peer lending, contact Allsquare on 0131 343 1510 or email hello@allsquare.org.