Unlike large companies, small companies do not have cash earmarked for big expenses. Nor have they got the back of investors. As a result, they depend on loans to tide them over during seasonal fluctuations in sales, for example.
Borrowing money for a business is not a cinch. There are a lot of formalities to meet to get the nod from a direct lender. One of them is having a good business credit rating.
If you are to borrow money for a new product line or expansion, you will have to submit your business plan, too. Banks and direct lenders can lend you money for your business, but there is another popular funding source as well, which is called peer-to-peer lending.
Peer to peer lending has been around for more than a decade, but people treat it as a way to meet their small personal expenses. Peer-to-peer lending is marketplace lending that involves borrowing from a pool of private investors. You can use this platform to borrow money for your business.
A peer-to-peer platform is an intermediary that connects you with lenders.
- You will fill out an application form on the peer to peer lending platform.Â
- The platform will evaluate the risk involved by measuring your credit rating.
- Lenders will decide which loans to fund based on the risk they can afford.Â
- Then, they will assign you interest rates
- You will be responsible for making interest payments over a period of time.Â
Bear in mind the lending platform will charge fees to facilitate the transaction between both parties.
Peer to peer lending can offer several benefits to your business
Your business credit score plays a significant role in deciding interest rates of small business loans in Northern Ireland, but peer to peer lending platforms do not follow strict criteria. Here are the special features of these loans that make them way better than traditional loans:
- You can avail yourself of lower interest rates, thanks to reduced staffing costs and the absence of physical branches.
- It improves the accessibility of loans because the approval criterion is not as strict as traditional banks and lenders. Chances of getting the nod for your loan are up here if traditional lenders have refused you.
- You will get money within two working days with a quick and efficient approval process. Sometimes, it takes less time.
- Many platforms run soft credit checks first, so you do not have to bear the risk of losing your credit points. You can get a quote without losing your credit points.Â
Although it is assumed that peer to peer lending is cheaper, you should always compare your options. It may not always be more affordable than traditional lending methods. Examine the repayment potential of your business.
Start-ups should err on the side of caution because peer to peer lending is not always an ideal solution for them. Lenders will take you to be a riskier borrower than established businesses. You should instead consider other options such as:
Start-up loans
You are more likely to get the nod for a start-up business loan from a direct lender or a bank, provided you have a solid business plan and a good credit rating. If your credit report is not up to scratch, lenders will be the only option for you. However, they will charge high interest rates.
It is not easy to get the green light for a start-up loan unless you have an impactful business plan. You cannot be so sure about the profitability of your business, so create a backup plan, too. You cannot escape the debt payments even if your start-up has failed.
Government-backed funding
You can also look for government-backed funding sources to fund your business. In addition to start-up loans, you can sign up for venture capital schemes. The scheme is subject to the benefit of tax reliefs to investors, giving various businesses a chance to grow by attracting investments.
Peer to peer lending is subject to some risks too
Peer to peer lending in the UK can be way more convenient than traditional loans, but they also have a few drawbacks.
No guaranteed approval despite receiving a quote
Even though your application is approved at an initial stage, you will be refused a loan if lenders suspect your affordability. Mostly borrowers who use peer to peer lending platforms are those who have been shown doors by other lenders, which means peer to peer lenders know the risk in lending you money. It is likely that no lender is actually willing to fund your loan.
No government protection
There is no protection in case you are scammed. If you are borrowing money through a peer to peer lending platform, do it at your own risk.
Added fees
The peer to peer platform will charge you fees for facilitating the transaction between you and your lender. This fee is a platform fee charged separately from interest fees. In addition, lenders may charge origination fees, too, which can be as high as 10%.
The default will be handled the same way
Your lender will cover the money the same way banks and lenders do when you fail to keep up with payments. The inability to repay the debt will result in a lowering of your business credit score. It will make it even harder for you to borrow money for your business down the road.
The bottom line
Peer to peer platforms can help you borrow money with ease and at lower interest rates for your business. Still, it is always recommended that you consider other business financing options too. Keep your business credit rating excellent and create a compelling business plan.
Your chances of getting the nod for a loan are up if you prove that you are not a risky borrower. Approach a reliable business loan broker in the UK. By doing this, you can choose a loan option that you think suits your requirements. Carefully assess your repaying capacity so you do not end up ruining the day. For more such informative articles, visit here.
