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Category: Business Date: 5/16/2011
We all know the pain that savers are feeling at the moment – low interest rates and inflation have made it a miserable time to save. Business savings accounts are not immune either, with rates offered on deposits hardly anything to write home about. Increasingly, businesses have taken their savings away from UK banks – preferring overseas banks or investments to get better returns on their surplus cash. Within this context the emergence of peer-to-peer lending is an intriguing proposition; we explore the pros and cons of peer-to-peer lending, and how it can be a serious option for a business with money in the bank…
The internet phenomenon of peer-to-peer (P2P) lending began in the UK with the launch of Zopa in 2005. Since then, Zopa has "matched" more than £123 million of loans, with a whole wave of other P2P lenders such as Funding Circle and RateSetter entering the fray more recently.
Essentially a peer-to-peer website brings together people who would like to invest, or "lend", with people who would like to borrow, in a bank-less environment. The absence of a bank means that borrowers can enjoy lower rates, and lenders greater returns in comparison to a normal savings account.
So long as your business doesn't offer consumer credit, or hold a consumer credit licence, you should be able to lend through peer-to-peer (although bear in mind that other criteria will apply).
Although returns can be higher than a bank or building society savings account, you should be careful when comparing the two. Peer-to-peer lending is an investment – so be careful to weigh up the risks and returns with other investments to see which is most suitable for you.
There are two particular risks to peer-to-peer lending:
You should try to spread your risk by lending to lots of different borrowers; however, it's still possible that you could lose money if one of your borrowers defaults on their loan.
Unlike a bank or building society savings account, where your business may be covered under the Financial Services Compensation Scheme (FSCS), a peer-to-peer lending website is not covered, meaning you could lose money if they go bust.
Whilst many hold your money in segregated client accounts, which protects un-lent money from creditors, be sure to check these arrangements before deciding to commit your business' savings.
Lent money continues to be subject to the credit agreement the borrower has signed, so you wouldn't lose this if the website went under, although you are still at risk of borrower default.
Read our companion "Lending using a peer-to-peer website" guide to learn more about this topic.
If you're looking at becoming a lender, the recently-launched peer-to-peer website, RateSetter, offers a unique proposition for business customers amongst other P2P sites. Sure, there are others out there like Zopa, or Funding Circle (where you lend to small businesses, not individuals), but RateSetter offers something different in the P2P marketplace…
RateSetter offers the option of a rolling monthly contract, where you can get access to your money if you need to. Normally, you have to commit your money for the loan term and there may be restrictions if you need to access it any earlier (if you're allowed to access it at all).
RateSetter has a bad debt provision fund that aims to ensure that lenders don't lose money from late payments and loan defaults. At the moment, RateSetter anticipates the bad debt rate to be less than 1.4% of all lending, while the provision fund currently covers this 4.9 times over.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at anytime.