Peer-To-Peer Lending For Businesses And Consumers Using Bitcoin Make Banks Obsolete
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Peer-to-peer lending (also known as person-to-person lending, peer-to-peer investing, and social lending; abbreviated frequently as P2P lending) is the practice of lending money to unrelated individuals, or "peers", without going through a traditional financial intermediary such as a bank or other traditional financial institution. This lending takes place online on peer-to-peer lending companies' websites using various different lending platforms and credit checking tools.
Most peer-to-peer loans are unsecured personal loans. They are made to an individual rather than a company, and the borrowers do not provide collateral as a protection to the lender against default. Business loans, including secured loans, are offered by some companies.
The interest rates are set by lenders who compete for the lowest rate on the reverse auction model, or are fixed by the intermediary company on the basis of an analysis of the borrower's credit. Borrowers assessed as having a higher risk of default are assigned higher rates. Lenders mitigate the risk that borrowers will not pay back the money they received by choosing which borrowers to whom to lend, and by diversifying their investments among different borrowers. The lender's investment in the loan is not protected by any government guarantee. Bankruptcy of the peer-to-peer lending company that facilitated the loan may also put a lender's investment at risk.
The lending intermediaries are for-profit businesses; they generate revenue by collecting a one-time fee on funded loans from borrowers and by assessing a loan servicing fee to investors (either a fixed amount annually or a percentage of the loan amount).
Because many of the services are automated, the intermediary companies can operate with lower overhead and can provide the service more cheaply than traditional financial institutions, so that borrowers may be able to borrow money at lower interest rates and lenders may be able to earn higher returns. Compared to stock markets, peer-to-peer lending tends to have both less volatility and less liquidity.
Peer-to-peer lending does not fit cleanly into any of the three traditional types of financial institutions—deposit takers, investors, insurers—and is sometimes categorized as an alternative financial service.
The Key Characteristics of Peer-To-Peer Lending Are:
* It Is Conducted For Profit;
* No Necessary Common Bond Or Prior Relationship Between Lenders And Borrowers;
* Intermediation By A Peer-To-Peer Lending Company;
* Transactions Take Place On-Line;
* Lenders May Choose Which In Which To Invest;
* The Loans Are Unsecured And Not Are Protected By Government Insurance;
* Loans Are Securities That Can Be Sold To Other Lenders.
Early peer-to-peer lending was also characterized by disintermediation and reliance on social networks but these features have started to disappear. While it is still true that the emergence of internet and e-commerce makes it possible to do away with traditional financial intermediaries and that people may be less likely to default to the members of their own social communities, the emergence of new intermediaries has proven to be time and cost saving. Extending crowdsourcing to unfamiliar lenders and borrowers opens up new opportunities.
Most Peer-To-Peer Intermediaries Provide The Following Services:
* On-Line Investment Platform To Enable Borrowers To Attract Lenders And Investors To Identify And Purchase Loans That Meet Their Investment Criteria
* Development of Credit Models For Loan Approvals And Pricing
* Verifying Borrower Identity, Bank Account, Employment And Income
* Performing Borrower Credit Checks And Filtering Out The Unqualified
* Processing Payments From Borrowers And Forwarding Those Payments To The Lenders Who Invested In The Loan
* Servicing Loans, Providing Customer Service To Borrowers And Attempting To Collect Payments From Borrowers Who Are Delinquent or In Default
* Legal Compliance And Reporting
* Finding New Lenders And Borrowers (Marketing)
One of the main advantages of person-to-person lending for borrowers has been better rates than traditional bank rates can offer (often below 10%.) The advantages for lenders are higher returns than obtainable from a savings account or other investments. Interest rates and the methodology for calculating those rates varies among peer-to-peer lending platforms. The interest rates also have a lower volatility than other investment types.
Peer-to-peer lending also attracts borrowers who, because of their credit status or the lack of thereof, are unqualified for traditional bank loans. Because past behavior is frequently indicative of future performance and low credit scores correlate with high likelihood of default, peer-to-peer intermediaries have started to decline a large number of applicants and charge higher interest rates to riskier borrowers that are approved. Some broker companies are also instituting funds into which each borrower makes a contribution and from which lenders are recompensed if a borrower is unable to pay back the loan.
Because, unlike depositing money in banks, peer-to-peer lenders can choose themselves whether to lend their money to safer borrowers with lower interest rates or to riskier borrowers with higher returns, peer-to-peer lending is treated legally as investment and the repayment in case of borrower defaulting is not guaranteed by the federal government (U.S. Federal Deposit Insurance Corporation) the same way bank deposits are.
Peer-To-Peer Lending For Businesses
Small business owners face a tough lending environment – even those with a strong operating performance, above-average credit, and available collateral. Traditional lenders don’t invest the resources to help entrepreneurs, whether due to small deal sizes, regulatory issues, or antiquated underwriting.
Peer-To-Peer Lending For Businesses solves this problem by connecting businesses with smaller-scale accredited investors — family offices, wealth advisors, high net worth individuals, fixed income funds, and alternative asset managers. Companies use best-in-breed technology for credit evaluation and in support of their marketplace functionality.
One of America’s greatest challenges is jumpstarting small businesses – banks and traditional lenders just aren’t willing to make loans, demanding high interest rates or long wait times.
At the same time, in the wake of the financial crisis, investors are searching for an asset class that promises strong risk-adjusted returns.
Peer-To-Peer Lending For Businesses was started with the mission of addressing these two problems by connecting investors with small businesses to the benefit of both.
Defined as an online marketplace which allows savers to lend money directly to small and medium sized businesses. Funding Circle was the first site to use the process of peer-to-peer lending for business funding in the UK,and now operates in both the UK and US markets. As of November 2013, Funding Circle has facilitated £170 million in loans to small and medium sized firms.
The idea was launched at a time when small businesses were struggling to obtain finance from traditional channels.
A report published by Nesta in April 2013 found widespread preference for online lending over traditional banks. 77 per cent of businesses that borrowed said they were ‘likely or very likely’ to approach a peer-to-peer lender for a loan first, rather than go to a bank.
Most Peer-To-Peer Lender's For Businesses provide a platform where investors can browse businesses that have their credit assessed and approved for lending.
Businesses submit an application which is reviewed by credit assessors. Once approved, businesses post their loan request in the marketplace. Here, investors choose which type of businesses to lend to, and through an auction process, bid the amount of money they wish to lend, and the interest rate they want to earn. Loan auctions typically take seven days. After the business accepts a loan, they make one repayment each month which is collected and distributed to all the investors. Loan requests are typically made up of lots of investors each bidding small amounts on hundreds of different businesses to spread their risk.
Some companies also have an Autobid function, where the system automatically places bids according to the criteria investors have set. Investors can choose the average rate they wish to offer, which types of businesses they want to lend to, and the maximum percentage of their portfolio to be lent to any one business.
Investors can build up their portfolios quickly by buying loans from other investors via the secondary market. Similarly, if investors need to withdraw money at any point, all or part of the investment can be sold via the secondary market. Alternatively investors can choose to withdraw their money gradually as they receive their monthly repayments. In the UK, loan lengths start at the 6 month mark and go up to 5 years. Businesses can borrow between £5k and £1M to finance: working capital, expansion capital, asset finance and one off business expenses.
If a borrower fails to fully repay the loan then the lender risks losing part of his or her return. To mitigate against this, some companies recommend that users lend to at least 100 businesses equally. This can be done with as little as £2,000 – i.e. lending £20 to 200 businesses.
In the UK any established and creditworthy business currently operating can apply for a loan, including partnerships, limited companies and sole proprietorships.
Businesses must have at least 2 years of filed or formally prepared accounts and have no outstanding County Court Judgements over £250. A minimum turnover of £100,000 is also required.
Compaines use many of the same credit checks as banks to ensure only strong, healthy and creditworthy businesses can post a loan request. This includes an Experian check, whilst also splitting businesses into five risk bands (A+, A, B, C, and C-). If a business defaults, Companies will pursue the business owner to recover the remaining part of the loan on behalf of the investors.
In partnership with Zopa and RateSetter, one major industry player launched a trade body, the P2P Finance Association, with the stated goal of "ensuring high minimum standards of protection" for lenders and borrowers in the industry. The association will also lobby the UK Government to regulate the industry itself. The Government has since ruled that peer-to-peer lending and borrowing activities will be overseen by the UK’s new market regulator, the Financial Conduct Authority, from April 2014.
Because lenders choose to which businesses and at what rate they lend, returns for lenders vary from person to person. However, during the first year from when the industry first started in 2010, lenders received an average return of 8.3 per cent before fees and taxes.
Peer-To-Peer Lending Platforms Enable Consumers To Bypass Banks When Borrowing
He turned instead to one of the nonbank, short-term lenders that have been gaining traction since the financial crisis. The lenders cater to small businesses, often at high cost.
Delaware-based Swift Capital reviewed his financial records and social-media sites such as Yelp and Facebook for reviews, then dispatched someone to one of his salons to pose as a customer. Swift wired him the money a few days later.
Mr. Nguyen is paying 14.9% interest over the loan's six-month term—the equivalent of about 30% annually. Payments are drawn automatically each day from his business bank account. "It's not cheap, but they served my needs quickly," he says.
About two dozen such nonbank lenders—including OnDeck Capital Inc., Kabbage Inc. and CAN Capital Inc.—lent about $3 billion collectively last year, double the 2012 total, estimates Marc Glazer, chief executive of Business Financial Services Inc., a lender with about $100 million of such loans outstanding.
These short-term lenders want to become the go-to financiers for business owners needing quick cash, often $50,000 or less.
"It is a substantially underserved segment of the economy," says former American Express chairman and chief executive James Robinson III, an investor in OnDeck alongside Google Ventures, SAP Ventures and PayPal co-founder Peter Thiel.
Banks generally require solid credit scores and spend weeks reviewing financial statements, tax returns and business plans. An online loan broker for small businesses, says an analysis of loan applications made in December showed big banks approved 18% of loan applications by its customers in December, while small banks approved 49%.
Various nontraditional lenders have stepped into the void. Peer-to-peer online-lending platforms channel funds from ordinary investors to borrowers. Private investment partnerships, including hedge funds, make direct loans to struggling businesses, often with costly strings attached.
Short-term lenders such as Swift and OnDeck typically structure their loans to be repaid in months, not years. To reduce risk, payments are collected daily or weekly, enabling lenders see how loans perform "in real time, as opposed to the wait-and-hope model," says Daniel DeMeo, chief executive of New York-based CAN Capital.
Speaking at a recent Small Business Administration conference, Treasury Secretary Jack Lew said the government wants to "do more to knock down barriers to financing," and he voiced support for new approaches to lending. "These companies are using alternative measures to assess a business's ability to pay back a loan," he said. "They use data like real-time shipping schedules, records held in a business's accounting software, and even social-media traffic to determine creditworthiness." The government, he said, wants to provide access, with a borrower's permission, to certain information reported to the government.
Since launching in 2007, New York-based OnDeck has issued more than 20,000 loans totaling more than $825 million. Fifty-six of its 225 employees have backgrounds in math, statistics, computer science or engineering and work on data analysis, credit modeling and technology infrastructure.
The typical customer is a restaurant, auto-body shop, beauty salon, retailer or physician seeking about $35,000—businesses that often have trouble getting traditional bank loans, says OnDeck chief executive Noah Breslow.
Ron Wendolowski, co-owner of DJ's Delights LLC in Asbury Park, N.J., sought cash to expand in 2012. He says he was turned down by a bank because the business was only two years old. So he applied to OnDeck.
OnDeck analyzed credit-bureau data and DJ's cash flow, and electronically checked state corporate filings and court records. It even checked diner reviews on social-media sites Yelp, Urbanspoon and Foursquare. Within a day, it approved a $6,000 loan with a six-month term.
Mr. Breslow says OnDeck customers are willing to pay a premium for "our speed, convenience, certainty and electronic delivery," and many "have not been served by banks."
Alternative lending to small businesses expanded during the financial crisis as bank credit dried up. The value of outstanding commercial loans under $1 million at federally insured banks—a proxy for small business—has declined by 15% since 2007, on a non-inflation-adjusted basis, to $284.5 billion in last year's third quarter, according to the Federal Deposit Insurance Corp.
In 2008, when the financial crisis hit, sales at Robin's Nest Floral and Garden Center in Easton, Md., dropped by 15%, according to owner Ken Morgan. The 30-year-old company needed $50,000 for a shipment of Christmas decorations. "I went to the bank, where I'd always done business on a handshake, and they were scared and having their belts tightened," he says. He was turned down.
Mr. Morgan applied to Business Financial Services, which examined his company's credit score, sales volume, cash flow and other financials—then clicked on Facebook.
The Robin's Nest page was "continuously updated with promotions and events," an underwriter reported. "There are numerous 'likes.' " The business topped Google searches of area florists, and had a stellar Better Business Bureau rating.
Business Financial Services wired the money, which was repaid within six months. Interest payments totaled about 18%—an annual rate of more than 35%.
"This isn't cheap money," says Mr. Glazer, CEO of Business Financial. "But we charge these rates because we are taking a risk, and losing millions every year."
As private companies, the lenders aren't required to disclose default rates. Several said they run in the single digits.
OnDeck says it approves 25% of all applicants and 75% of those meeting its initial business and credit filters, which include being in business for at least one year and having at least $100,000 in annual revenue.
Swift says it approves more than three-quarters of applicants. "If we looked at just the credit score, the way a bank does, that eliminates more than half the market," says chief executive Ed Harycki. Swift says it has provided $350 million to more than 10,000 businesses.
Unlike banks, the short-term lenders don't take deposits, so they need other sources of capital to fund the loans. OnDeck has an $80 million credit facility from a syndicate that includes Goldman Sachs Group Inc. "They have a successful business model that we like," says a Goldman spokesman.
This fall, OnDeck secured another $130 million from, among others, KeyCorp. Adam Warner, president of Key Equipment Finance, says loans to OnDeck and to CAN Capital are "a way to diversify our small-business lending."
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