Debt finance: what are P2P Lending and Mini Bonds?
Debt Crowdfunding (DC) is a way of financing a business via the Internet, where a large number of people (lenders) provide the needed funds in exchange for a debt instrument that pays interest return (usually).
Peer-to-Peer Lending (P2P Lending) – or Marketplace Lending – is the most common DC (sub)model. This allows for the lending of money while bypassing traditional banks. Returns are financial, but investors also benefit from having contributed to the success of an idea they believe in (at least in some cases, where the platforms allow lenders to choose the business to lend to).
DC also includes Mini Bonds. Typically they have longer terms (three or more years) and larger sizes (no restriction on size), and reward investors in the form of either annual interest payments or a lump sum at the end of the term (alongside their initial investment). Only certain, more established businesses may qualify for Mini Bonds.
DC for business has the largest share of the Alternative Finance (Online) market in the UK: around 50%.
There are around 20 DC platforms for business, in the UK (the most developed P2P Lending market in Europe). The requirements and processes they have vary. Some allow lenders to choose the business to lend to. Some do not – these spread the lender funds across several businesses to diversify the risk.
P2P loans are usually secured against some traditional collateral (tangible assets such as property are still preferred). Minibonds are usually not. The interest charged to a business reflects the loan’s overall risk, as calculated by a platform’s risk model.
Deciding which platform is best for a business requires some due diligence, considering the specific circumstances of the company seeking funds.
P2P Lending – factors to consider
To apply for a P2P loan in the UK: companies need to have two or more years of trading history with a minimum turnover of 100k GBP (normally).
They need to be able to show that they can repay the loan (some platforms want to see profitability in the last financial year at least). Loans start at 5k and can go up 3M GBP. Some platforms may do bigger ones. Terms between six months and ten years (most accept up to five years only).
Fees between 1.5 and 6% of loan size. Interest rate from 6% (most around 10). Most loans are secured. In some cases, platforms ask the directors for personal guarantees. Some charge an early repayment fee, some do not.
Just over 20% of applications are successful. Depending on the process platforms use to fund the loan (for example some use auctions which tend to last 14 days), the time it takes to get a loan varies between a few days to a month.
UK P2P Lending platforms focus on UK companies – they have to be Limited (Ltd) or LLP.
To learn more about Crowdfunding, please attend the following webinar (multiple dates):