What is Peer to Peer Lending (P2P)
Peer-to-peer lending, Also abbreviated as P2P lending, is a practice of lending money to individuals, companies and businesses through an online service that matches the lenders with borrowers.
Is P2P Lending Process Safe?
The P2P lending process is 100% safe, However making any loan, peer to peer lending involves a certain amount of risk. The best way to mitigate this risk is to fully research the credit rates assigned by the P2P companies, and diversify your funds across several loans.
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Why Start a Peer to Peer Lending Business?
The peer to peer lending business is a very interesting one and this business came on board as a result of economic downturns that forced banks to become reluctant in lending money to high risk individuals. Peer to peer lending business allows people to who are looking for loans to either start a new business or to pay off high interest on their credit cards, to be funded by other individuals instead of banks.
Most peer to peer lenders usually operate in marketplaces. Even though starting a peer to peer lending business might look easy, it is however a serious business that is plagued by a high risk as well as heavy regulations. This is especially one of the reasons why adequate research has to be done.
It is imperative that you hire an attorney that will help you navigate the complex securities and banking regulations that surround the peer to peer lending business, and also help in drafting a comprehensive loan agreement. Asides attorneys, you would need to work with professionals in the finance and consumer credit sector that will help in generating policies and procedures that will not only be up-to-date but also comply with the regulations – such as Fair Credit Reporting Act, Electronic Fund Transfer Act, Equal Credit Opportunity Act, Truth in Lending Act, and the Bank Secrecy Act – in the sector.
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The growth of the internet has seen the increase of peer to peer lending businesses not only in the United States but also globally as well. Also, technological innovations has seen peer to peer lending businesses offer quick updates with users also having a smoother access to interfaces.
Interesting Statistics About the Peer to Peer Lending Business
According to the report by Transparency Market Research, as at 2015, the peer to peer lending market was valued at $26.16 billion globally. It has been predicted that by 2024, the valuation for this sector will rise to $897.85 billion, with a significant CAGR that will expand to 48.2%.
Asides technological innovations which encourage existing players as well as potential customers to make quick decisions, the growth in this sector can also be attributed to the low operational costs. Also, since more students prefer to take loans from peer to peer lending businesses than traditional lending institutions due to their cheaper interest rates, this has also propelled the sector to enormous growth. This does not however mean that it has been all good for this industry, as default payments is threatening to have a serious impact on the growth of this sector.
Due to the ease of access for funds from peer to peer lending businesses, small businesses owners, and startups now prefer to get funds especially as there is absence of strict regulatory framework and complicated compliance structure.
Globally as at 2015, the peer to peer lending market was dominated by North America with over 43% share. The Asian Pacific with emerging economies like China, Japan, and India has also tapped into this market making a significant impact with Australia following closely behind. The market is highly concentrated with few top players taking large share revenue of the market.
In the Unites States alone, peer to peer lending has doubled every year since 2010, according to a report by Morgan Stanley to $12 billion by 2014. Factors such as low operating costs, large availability of data, minimal regulations as well as technology has helped in propelling this business seriously. It has also been predicted that this is a fast growing financial model that could upstage the normal traditional banking industry, as institutional investors have also joined this market.
One sector that the peer to peer lending has focused on is unsecured consumer credit, as about 80% of loans are used to consolidate small business loans and debt. However, even though there is ease of entry with little or no capital requirements, and lower operating expenses, which invariably leads to low interest rates for borrowers, peer to peer businesses still do not have it all as they are faced with a tough regulatory environment. Also, even though this business was birthed during the great recession, it really hasn’t faced an economic downturn to really determine how it would fare.
Globally, other countries seem to have the same issues such as the United States. In China for instance, peer to peer lending businesses can operate both online and offline. The sector is highly fragmented as there are more than 1500 such businesses in existence. However, unlike the United States, China’s peer to peer lending businesses aren’t recognized as regular financial institutions neither do they have any access to the nation’s credit reference database.
Another interesting market is the United Kingdom, whose market share dominates about 80% of the whole Europe. Most of their practices are similar to that of the United States; however, while the peer to peer lending businesses in the United States have more of students as customers, that of the United Kingdom are much older.
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List Of Well – Known Brands in the P2P Industry
Every industry and sector has brands that are well known which is due to the fact that they probably are good at what they do, or have deployed better strategies that have brought them to the fore. Some of the well known peer to peer lending businesses in the United States of America are as follows;
- CircleBack Lending, Inc,
- Prosper Marketplace, Inc.
- LendingClub Corporation
- Funding Circle Limited
- Social Finance, Inc.
- Upstart Network, Inc.
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How to Start a Peer to Peer Lending Business
Starting a peer to peer lending business isn’t difficult and almost any serious entrepreneur can start this business. The capital requirement however depends on what the objectives and goals of your peer to peer lending business is. This means that while someone in the same scale as you might start off with lower capital, yours might be larger perhaps due to the number of areas you intend to specialize in.
If you intend to start your peer to per lending business in the United States of America, then you would need to ensure you have done some of the requirements listed below;
Cost of incorporation $750
Insurance policy cost $750
Cost for business license $500
Cost of leasing a facility for at least a year $25,000
Cost of equipping the office with computer, phones, printers and furniture $2,000
Cost of launching a website $700
Cost of acquiring a software $1,500
Marketing budget would cost $1,000
Additional expenditure such as business cards, and signage $500
From the requirements listed above, it would cost an entrepreneur who wants to start the peer to peer lending business in the United States of America on a low scale, an average of $33,000 If you intend to start off your peer to peer lending business on a medium scale, you would need an average of $66,000
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And if you intend starting your peer to peer lending business on a large scale, then you would need an amount around $133,000.
Financing Your Peer to Peer Lending Business
Even though the peer to peer lending business is one that deals in lending money out to those who need it, finance is a very important part of starting and running the business. Without finance, whatever fantastic ideas you might have for your peer to peer lending business will come to naught if you do not get the required cash to see that your idea becomes a reality.
Sourcing for cash is not easy in any way, which is why it is highly necessary to have a business plan at hand. A business plan helps you overcome the large hurdle of trying to convince investors through word of mouth. A comprehensive business plan not only shows investors and lending institutions of how serious your business intentions are.
Check Your Cash Before You Check Their Cash.
Do a credit history check before you anybody a loan, even if they are your friends. The truth is that banks have solid reasons to deny loans at times, and you must know why a bank denied so that you do not make a mistake. Have a look at the person’s credit history to be sure of things. For a P2P business you need to have a steady flow of money. How will you lend it if you run out of it?
Get Yourself a Platform.
Most P2P startup business owners prefer setting up their office at home. This helps save money on the rent; you can use that money to make a website. The website will be your main platform through which you’ll be automating the application submission and screening process. You can also use social media platforms since a large number of people are on the web.
However, P2P mainly works on relationships as you’ll be available to your friends and family first, so see how you can reach them.
Encourage Presentations From Applicants.
A presentation is just your applicants presenting their case highlighting why they need money and why the loan should be granted. You should encourage presentations as this will help attract more applicants too. These presentations will also help you make an informed decision.
Diversify Your Earnings.
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There are many ways you can earn from your P2P lending business. You can charge interest on the amount given in addition to application charges and fixed borrowing fee. In addition to this there can be charges for late submissions etc. However, don’t end up being too expensive.
Get Lending Partners.
Instead of riding it out solo, get in touch with other lending partners so that your loaning product line has more variety. One of the best things about the P2P lending industry is that some businesses allow people reverse-bidding on interest rates for a loan. If the opening bid is $10,000 load with interest rate of 18% other lenders might counter the interest rate with only 6%, making the applicant think twice.
Know the Risks and Plan Accordingly.
People resort to P2P lending options because they’ve been refused by banks. This should tell you that all your clients are potentially a risk. Put the interest rate higher to counter the higher risk level and screen very carefully. Other risks include your servers who’ll get constantly hit by hackers for sensitive information, in order to be secure you need to hire a professional.
NOTE: a reminder that P2P companies use the same marketing tactics and strategies as the credit-card industry and payday loan businesses to encourage borrowers to keep taking loans
P2P websites are very easy and fast, and the approval process is much quicker than traditional loans. which can make a passive income for you.