From Patrick Watson at Forbes:
“The new way to be your own bank is as simple as it is ingenious. It’s called peer-to-peer (P2P) lending. Using any of several online platforms, both lenders and borrowers can transact loans directly…With the bank out of the equation, the borrower’s rate drops and the lender’s return goes up. The difference can be significant for both lender and borrower. And P2P can be a great portfolio diversifier if you already have stock or bond investments. Of course, rates go up and down over time, but P2P lending can earn investors a higher yield than most other fixed-income instruments—without higher risks.”
With peer to peer lending bursting into the financial services scene, P2P lenders are growing exponentially, but there is still a long way to go before they gain a significant market share currently dominated by traditional banking. The relative ease of making finance available, coupled with today’s environment of low interest rates and rising inflation makes P2P lending a viable alternative for both lenders and borrowers.
With that said, it is critical for one to understand the potential risks of P2P lending as well: the risk of default as well as liquidity risks. Investing in P2P platforms means that your cash is tied up for the loan term and selling your loans to another investor or withdrawing might not be possible. In order to mitigate default risks, it is crucial for investors to select P2P platforms that suit their risk appetite, understand details of the borrowers as well as to diversify investments. Proper due diligence can also be done to ensure that the platform is financially stable and growing in the healthy direction.
From Peter Daisyme on Forbes:
“In advising all types of startups and established small businesses, I find that many are seeking some additional funding that is too small for an angel investor to get a return for their effort. Banks also think it’s not worth their time. However, the amount necessary may be too much to finance on a credit card, or perhaps the entrepreneur doesn’t want to use that method. That’s where peer-to-peer (P2P) lending is working to fill that lending gap and why I recommend considering this lending alternative. I find that this model may be a solution for many small businesses that are struggling with just tapping smaller funding amounts.
Some of the immediate benefits of a P2P loan is that no collateral is required. Lower interest rates tend to be available, depending on your credit score, loan amount and loan term, because the peer-to-peer lenders operate with low overhead. You can repay the loan early and not have to contend with any prepayment penalties. Since it is an online lending environment, you’ll also enjoy faster approval and no paperwork except for a few online forms and a digital signature.
Once you borrow and repay the loan, there’s an opportunity to continue using your P2P lending connection to tap additional funds later on whenever you need additional capital. That accessibility can help your business goals and deliver quickly rather than leading to extra time pounding the pavement for money. ”
For start-ups that have yet to build strong financials or establish a strong credit record, P2P financing serves as an alternative funding method that can greatly improve the cash flows and hence business growth. Some additional advantages include faster approval process as well as reduced paper work, which make P2P financing an even more attractive option.