Peer-to-peer lending sites are still a growing phenomenon in the UK. Their publicity efforts tend to centre on their benefits for investors, mainly the relatively high interest rates they offer to savers. The success of the sites depends on winning over lenders looking for a home for their savings: there is less material out there about their advantages from the point of view of borrowers.
It’s assumed that potential borrowers, particularly business borrowers, will find their own way to the sites with minimal encouragement, given the tight credit market of recent years.
If you run a company that’s in need of investment, the financial climate isn’t easy. It’s hard to get backing from the banks, even for small loans. What are your options? Of the top three UK peer-to-peer sites, the biggest one for business borrowing is Funding Circle (FC).
Who can borrow through Funding Circle?
A business is eligible to apply for a loan of between £5,000 and £1,000,000, if it
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Has a turnover (not profit) of over £100,000 per annum
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Has filed accounts at Companies House for at least two years
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Is a limited company or LLP, not a business run by an individual or a partnership
The loans are repayable over a period between six months and five years. A personal guarantee for the loan is expected in all cases, and for larger loans over £100,000, the site requires security to be given, either on a specific asset to be bought with the loan proceeds, or generally over company assets.
How does it work for borrowers?
A business needing to borrow must initially complete an online application. Funding Circle estimates that should take about 20 minutes. They aim to process the information, complete routine checks, and revert to the borrower with a decision within two days.
FC will do a credit check with Experian, and will also check with CIFAS as to whether any fraud has been recorded in connection with a company director.
The borrower’s proposal may be accepted or rejected outright, or Funding Circle may request modifications in the terms or the security required. In some cases, the company may be restricted to borrowing a smaller sum that they had intended. Depending on FC’s assessment of the borrowing company’s financial strength, and the degree of risk in lending to them, the loan request, once accepted, will be assigned a ‘risk band’ which determines the range of interest rates allowed for the loan. The rates range between 7.2% and 11.5%, as at November 2013.
Once agreement has been reached on terms, the loan proposal will appear on the FC website, with information about the company’s credit rating, accounts, and the purpose of the loan, together with details of any guarantee and/or security.
Within the assigned risk band, lenders can offer to lend money at their chosen rate, which is driven down in a reverse auction as successive lenders place their ‘bids’. The more popular the lending proposition, the quicker the interest rate will go down. It usually reaches the minimum for its particular risk band, but may not do so if the proposal doesn’t appeal to the lender members of the site.
Appealing to lenders
To ensure the best chance of your proposal attracting the lowest interest rate for its band, make your proposal full and convincing. Describe your company mission and values, and explain why you need the money as precisely as possible.
Make sure that any issues with your credit score have been resolved with Experian as far as possible, as the company credit rating is very important to lenders. Above all, answer their questions as promptly and fully as you can, even when, as is sometimes the case, they are phrased less than diplomatically. Far fewer people will lend on a proposal with unanswered questions outstanding, or with questions they think aren’t answered fully.
After the auction
When the loan is fully funded, usually at the minimum rate for the band, the borrower must decide whether to accept the proposal or not.
If it’s accepted, the loan, consisting of 10’s or 100’s of small slices coming from individual investors, will be administered by FC who will distribute the repayments between the investors and chase up late payments. They will be responsible for collecting the debt through the courts if necessary, and will enforce any guarantee or security, should the loan go bad.
If you are thinking about borrowing through Funding Circle, it’s a good idea to get familiar with the website and watch a few auctions first. You can get an idea of the process and also the sort of questioning you may face from potential investors.