Peer-to-peer lending or P2P lending has emerged as a popular means of alternative lending among small and medium-sized enterprises or the SME finance sector.
In simple terms, this practice lends money to businesses or small entrepreneurs through online platforms that match lenders with borrowers.
This cuts out large financial institutions like banks, credit unions, and NBFCs as the middlemen. Also known as Crowd lending or Social Lending, P2P lending platforms connect the borrowers directly with the investors.
Understanding P2P Lending
Several small business owners in semi-urban and rural areas may find financial services inaccessible as they fail to secure loans from the organized financial sector.
Most of these loans are personal loans, which borrowers need for a variety of purposes like debt consolidation, business needs, and working capital loans.
However, these small businesses stay starved for a choice of lenders as they get denied traditional loans. They may fall easy targets to unorganized private lenders or loan sharks who may charge extortionate interest rates on the loans, making them further inaccessible.
In such a financial scenario, the need to find alternate sources of business funding gains prominence.
Several Fintech companies in India have now come to the rescue of small business owners.
Since 2012, P2P lending or crowdfunding has emerged as a potent source of borrowing in the market. As of 2017, the RBI has recognized it as an NBFC with the same status, privileges, and regulatory guidelines.
How is P2P Lending an Ideal Choice for Small Businesses?
P2P Lending provides an opportunity for the borrowers and lenders to meet on a common digital platform. This practice gives them a chance to understand each other’s requirements – the lender gets to earn an income while the borrower secures the funds at affordable interest rates.
Moreover, in P2P borrowing, the interested SMEs can interact with thousands of individual lenders who can view and decide on their financial requirements.
SMEs generally face difficulties in securing loans from banks for business operations and expansion. Almost all banks consider the formal financial history and have stringent credit score checks from a credit bureau before imparting any loans.
This makes personal loans either very expensive or inaccessible to these small businesses.
Here is how Peer to Peer lending can offer assistance to small businesses when banks cannot help them:
Reasonable-Cost Operations:
P2P lending platforms follow a well-designed online credit modeling process based on an integration of technology and finance. They directly connect lenders with borrowers so that there is no chance of any intermediaries.
This results in a low operational cost so that the full benefit passes on to the parties involved in the transaction. The lenders get higher returns on their capital while the borrowers get loans at low-interest rates.
Extensive Coverage with Online Medium:
Most small businesses in rural and semi-urban regions in India are unable to secure loans due to either being rejected by banks or due to the absence of appropriate lending agencies in their area.
It also becomes expensive for financial institutions to extend coverage in the vast Indian mainland territory, especially in the rural and remote areas. However, P2P lenders make use of online platforms and mobile banking that provide easy access to online lending. This factor is responsible for making P2P lending to reach out to every SME across India.
No Collaterals Requirements
Most small businesses hesitate to approach banks for financial loans as they ask for collateral for a loan. The small businesses find it very difficult to put up their personal property for business loans, in the absence of which their loan applications get rejected.
P2P borrowing does not ask for any collaterals or security, making it easier to secure business loans with minimum hassles.
Automated Credit Evaluation
Credit evaluation is a significant factor in determining the borrower’s needs and the biggest reason why loans for small business enterprises face rejection by banks.
The traditional banking system also uses a long-drawn and time-consuming process for credit evaluation, leading to delays in securing loans.P2P lending platforms have tried to resolve this issue by using advanced and automated credit evaluation methods.
They use advanced data algorithms for credit evaluation to evaluate even those borrowers who do not have credit scores from credit bureaus or who do not have any credit history. These alternative techniques not only reduce lending costs but also improve the underwriting process.
Less Documentation and Checks
P2P platforms utilize credit scores and social media activity to connect borrowers and lenders at affordable interest rates. Generally, they have low regulatory restrictions.
This is because they merely act as intermediaries between the borrower, lender, and the partner bank.
P2P platforms also arrange for documentation for the loan contract between the lender and the borrower. The lender transfers money from his bank account to the borrower’s bank account.
The platform may collect post-dated cheques from the borrower in the lender’s name as a loan repayment security measure.
Fast and Easy Procurement of Loans
Small businesses generally need business loans at short needs to avoid any capital shortfalls in their business operations. The traditional loan process is a time–consuming one that requires days to collect, examine, assess loan documents, perform credit checks, and finally give approvals.
This exercise may take days. However, P2P lending platforms make the entire loan procurement process much easier and faster for small businesses. The borrowers can get loans within 24 hours if their loan profile gets approval.
Safe Recovery Process
P2P platforms utilize bank KYC practices to assess their customers. All payments are through bank accounts, which means that the concerned banks have already carried out the KYC exercise. They also help in the recovery process of the loans to safeguard the lenders’ interests on the forum. They can employ recovery agents to follow up with borrowers for loan repayments using soft recovery practices.
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