Financial technology is a frenetic and fast-paced sector, where today’s innovation can quickly become yesterday’s news. One of the few major innovations to have real staying power is peer-to-peer lending (commonly known as P2P), which has gone from strength to strength in recent years. The flexibility and multiple applications of P2P lending has seen it put to use in almost every scenario conceivable, and the recent proliferation of P2P lenders has seen an expansion into peer-funded bridging loans.
In this article we’ll discuss precisely how P2P lending works, what makes it an attractive option for both borrowers and investors, and what types of product are available to consumers. It’s important to bear in mind that as with any investment product it’s important to fully understand the implications of any peer-to-peer funding scheme, and individuals should consult a professional before deciding to invest or borrow from these sources.
The concept behind P2P lending is fairly simple, but has only really been possible with the advent of digital technology. The idea is this; the lender offers traditional consumer finance products in the same way that any other lender would do. The difference is that they source the funding for these loans from a large group of individual investors, rather than from specific backers. A traditional bridging loan might be funded by only a few investors, whereas P2P loans may be funded by hundreds of individuals contributing a small percentage each. Tracking and apportioning these many different loans would be impossible without highly sophisticated digital systems, which is why P2P lending has only really been possible for the past two decades or so.
This system is clearly innovative, but how does it benefit the individuals involved? For those who put their money in the pot, P2P lending offers an attractive way to invest their money; interest rates are typically above those available on the high street, and a selection of different products allows investors to choose their own combination of risk and reward. For borrowers, there are numerous advantages; firstly, P2P loans are often cheaper, as there is far less infrastructure to support. In addition to this (and of specific interest to those interested in bridging finance), P2P loans can be approved exceptionally quickly, with funds often available within a week. This is possible thanks to the fully digitised nature of P2P lending, and also due to the manner in which loans are funded; many platforms automatically apportion investor’s funds from a pool, so loans can be funded quickly and easily.
The expansion of P2P platforms into many new areas of the financial sector has led to a diversification in the types of finance on offer, including into the highly specialised world of bridging finance. In short, bridging loans are high-value short term secured loans that are often used to “bridge the gap” while a long-term financial solution is put in place. Bridging loans are often used by property developers to secure or restore properties while a mortgage is arranged, or by businesses to help seize opportunities for expansion.
For the past 50 years, bridging finance has been the domain of highly specialised brokers and investors, but the new wave of P2P bridging lenders has introduced a new way of doing things. Platforms such as Kuflink and LendInvest provide a range of bridging products that can be used for any number of different applications, and are able to connect borrowers with the necessary funding faster than most other bridging providers can.
As with any new service, investors and borrowers alike will want to know exactly how safe their money is. Without the backing of major banks, borrowers may understandably be nervous about relying on a relatively new form of finance, while investors need to know that their money is invested wisely and responsibly. In order to assuage these fears, P2P lenders put in place a number of measures that ensure all parties can have confidence in their finances.
It’s common practise amongst P2P lenders to designate an “umbrella fund” to mitigate the effects of default on their lenders. This fund is used to make up any shortfall from borrowers who fail to repay their loans, meaning that investors who are covered by this fund will never lose money, even if their borrower defaults. Some platforms pursue alternative options, however, and some allow investors to opt-out of this fund (Zopa, for instance, offers investors the opportunity to make higher returns on their loans if they forego this cover).
Likewise, borrowers also need to know that their funding won’t suddenly fall through; property developers, especially, must be able to rely 100% on their finances in order to bring projects forward. Platforms like Kuflink achieve this by funding 20% of each loan themselves - by putting their money where their mouth is, they give both investors and borrowers confidence in the stability of the loan. In addition to this each P2P platform conducts extensive underwriting checks on each loan application before submitting it for funding, so that investors are confident in the security of their capital. Confident investors mean a reliable loan, so this assurance also guarantees that borrowers will be satisfied.
As P2P lending becomes more commonplace, the Financial Conduct Authority is beginning to certify P2P lenders for consumer mortgage products. Kuflink received their FCA certification in 2016, and now offers private individuals the ability to finance Buy-to-Let purchases through a peer-to-peer sourced bridging loan. LendInvest offer a wide range of loans that are specifically designed to meet the needs of businesses and SMEs, and their flexibility and speed of service makes them an attractive prospect for many borrowers. As we move further into the 21st Century, P2P lending seems set to make its mark in the financial landscape, and with ongoing digitalisation of people’s lives P2P finance could even go on to become the norm.
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