Traditionally, when a company or a person wanted a loan, they would often go to the only place where they could get one: the bank. But now there’s another option called peer-to-peer (P2P) lending.
P2P lending started about a decade ago and came to Canada only recently. Companies like Lending Loop act as an intermediary between small businesses that want to borrow money and people that want to lend money. Previously, only accredited investors—those with more than $1 million in assets—were usually allowed to loan money but now anyone can.
There were about 1.1 million small businesses in 2012 with employees (excluding self-employed individuals), according to Industry Canada. Many of them are turning to P2P lenders because they sometimes have trouble getting a loan even if they’re consistently profitable. It can be even more difficult if they don’t have collateral to use against the loan.
How does P2P lending help small businesses?
For borrowers, certain criteria must be met. If they want to get a loan through Lending Loop, the business must have been operating for two or more years, have annual revenue of $200,000 or more, have assets they can use as collateral or can sign a general securities agreement. The borrowing process is quite easy. Borrowers only have to create an account, complete an application (which takes about 30 minutes), have their loan approved, accept the loan terms, wait for funding, and then accept the funding if it’s successfully funded.
If you want to be a lender, it doesn’t take much to get started. At Lending Loop, you need just $200 to fund your account and can lend as little as $25. Unlike a bond, the money you lend is locked in until the loan is paid off. However, some borrowers may choose to pay off their loan early and you can re-lend money immediately.
How does P2P lending benefit lenders?
Although your money’s locked in, the investment returns you’ll get can be anywhere between 6% and 15.5% annually over a period of six months to five years. Those returns aren’t guaranteed, but they’re much higher than what you would get if you put your money in a high-interest savings account or GICs, which have rates of as much as 3%. Instead of waiting for the loan to be paid off in full, you’ll receive monthly payments from the borrower. You can then re-lend that money to other borrowers, thus diversifying your portfolio. The benefits of P2P lending are good for both borrowers and lenders. Borrowers now have access to money they didn’t have before while lenders can get a better return on their money in a low-interest rate environment.