5 Ways to Improve the Loan (P2B) Crowdfunding Industry
As traditional business lending continues its downward spiral, the rise of peer-to-peer (P2P) lending has been nothing short of meteoric, with exponential growth figures above 140% over the last couple of years. This is all because P2P lending platforms combine the distribution power of the internet with the wisdom of crowds.
Zopa was the first P2P lending site; it started in 2005, with individuals lending small amounts to other individuals. Since then, the concept has expanded to embrace peer-to-business (P2B) lending, or loan crowdfunding. Now there are many platforms offering various forms of loan crowdfunding, with Symbid recently adding its own.
The concept is simple. A small business wanting to raise funding to scale up its operations advertises its need on a crowdfunding website. It provides a basic business description, the purpose for which the funds will be used and some financial records. In some cases the site itself then generates some sort of credit score for the business, linked to a risk rating. We at Symbid, however, use an independent scoring agency for this. Individuals then select businesses to lend to based on the projected interest rate over the duration of the loan.
Yet the great majority of small businesses don’t use P2P lending or crowdfunding. In a survey conducted by Manta, only 2% of small business owners reported using loan crowdfunding. Another poll from Gallup-Wells Fargo found that just 3% of small businesses use crowdfunding. This sector has huge potential, but is a long way from truly replacing traditional bank lending.
Any industry experiencing such rapid growth is bound to experience obstacles. The task facing businesses, investors and the crowdfunding platforms themselves is to identify these obstacles early and begin addressing them. Here are 5 areas the online business lending sector must work on if it is to continue its exponential growth.
1) Keep interest rates at sustainable levels
As an alternative to bank financing, loan crowdfunding is used widely by businesses which might otherwise struggle to get funding via traditional routes. Clearly, the higher risks involved with these loans should entail higher interest rates. Indeed, P2B lending rates range from 7 to 12%, while (US) bank interest rates to small businesses average between 4 and 7%.
However, if peer-to-business loans are to be seriously considered alongside bank financing, the gradual rise in interest rates must end at some point. We at Symbid have noticed an escalation of investor expectations in the last couple of years, as crowdfunders continue to pick loans with higher rates regardless of the business’ status or the risks involved. This is pushing up the market standard and making it harder for businesses to seek loans at sustainable interest rates through P2B crowdfunding.
This will become even more important if, as the global economy continues its recovery from the 2008 economic crisis, bank lending to small businesses increases and interest rates drop.
2) Protect investors while opening up to new businesses
Perhaps not a pressing issue, but nonetheless important to consider as the sector matures: online P2B lending platforms can be hard to qualify for. These platforms are often (wrongly) seen as dumping grounds for the banks, full of risky loans with a high chance of default. Yet, in truth, many platforms maintain high standards which some start-ups find impossible to meet.
Of course, each platform is free to position itself in the market based on the kind of investor it wants to attract. But as loan crowdfunding matures and becomes more professionalized there’s a risk the leading platforms will forget the sector’s core reason for existence: to provide a funding alternative for small businesses that, for whatever reason, have been rejected elsewhere.
Now many of the leading platforms, including Symbid, maintain strict criteria for any business seeking a loan from their investors. This can include a solid financial history over at least 3 years, positive cash flows, no existing debts etc. While this helps to protect the investor from high-risk investments, it obviously prevents start-ups and “idea stage” companies from participating. If P2B lending is to continue its exponential growth then some platform diversification with lower barriers to entry may be required – especially as (rival) alternative lending institutions continue to grow.
3) Fair securitisation
One of the main problems with the traditional loan market for start-ups and small businesses is the level of securities required to secure a loan.
Stories of entrepreneurs losing everything at the hands of their creditors are increasingly common. More than this, entrepreneurs are often prevented from ever recovering from an “honest bankruptcy” due to loan terms that border on exploitation. This is one are where P2B lending platforms can really differentiate themselves from the traditional financial institutions. Currently, the majority of loan crowdfunding platforms still make entrepreneurs personally liable for the failure of their businesses – even though the likelihood of their crowdfunding lenders being compensated in the event of a bankruptcy is very small.
Whether or not entrepreneurs should be made personally liable for commercial bankruptcy is a hot issue for P2B lending platforms. One thing’s for certain: pushing for a fairer securitisation than that asked by the banks can only attract more small businesses.
4) Differentiate from P2P lending
Loan crowdfunding (or P2B lending) is often confused with peer-to-peer lending – the practice of matching individual borrowers and lenders through online platforms. In recent months has also been mistakenly absorbed into the broader marketplace lending industry – a term used to describe the many, many forms of P2P lending.
If loan crowdfunding is to increase its legitimacy among business owners and be taken seriously as an alternative to bank loans it must first clearly define itself against its birthmother, P2P lending. But here is where it gets tricky. Many sites offering P2B lending are actually offering a P2P service, despite the borrower using the loan for entrepreneurial and business endeavours. Here at Symbid, our loan crowdfunding model is based strictly on P2B loans.
Loan crowdfunding in the P2B sense involves lending money to help fund a business. Although the criteria can differ across platforms, loan crowdfunding generally requires a good credit history and solid financials. P2P lending can take place between private individuals and is heavily associated with fundraising, social or creative projects, and personal finance.
The development of a neutral, industry-wide body with the authority to clearly define loan crowdfunding through regulation is something to be hoped for.
5) Increase financial transparency
A major reason for distrust towards loan crowdfunding among more serious investors and entrepreneurs is the lack of transparency in business and financial data. While larger, public companies must declare their accounts and financial statements on a regular basis, private companies (start-ups and small businesses) can be more selective in the information they present to investors.
We at Symbid believe crowdfunding investors, like venture capitalists or angel investors, have the right to full awareness of how a company is performing before and after they have invested. That’s why we developed Monitoring by Symbid, a tool giving private investors ongoing insight into the business KPIs of small businesses.
Increasing transparency in crowdfunding is key to its future development, and can only help to improve the online relationship between investor (or lender) and entrepreneur.
Are you interested in what learning more about what loan crowdfunding can do for you? See how our take on P2B lending is a new, more entrepreneurial way of crowdfunding loans.