What Borrowers and Lenders Need to Know
Peer to Peer Lending: What Borrowers and Lenders Need to Know
The Background - Where did it all start?
Traditionally, banks held a monopoly on lending to businesses and individuals. Pre-financial crisis, anyone or any company looking to borrow money would visit their local bank, or in the case of a large financial institution, call up their relationship manager. Post-financial crisis, the credit markets tightened and many borrowers across all classes found it very difficult, or were unable to get any type of funding from large financial institutions. This was particularly hard for small businesses in the Small to Medium Enterprise (SME) market and stifled the growth of start-ups looking to launch their new ideas. Moreover, even when banks did manage to lend to a SME, the interest rates were usually very high, often making the launch of a new business prohibitive. Additionally, when loans were secured with fixed assets, such as land and property, it was still difficult to borrow.
In the early 2000s, technological advances started to open new opportunities across industries. With the birth of social media and the emergence of FinTech, the sharing economy began to take shape and challenge traditional lending institutions. In 2005, Zopa was launched in the UK due to a failure of banks to lend to consumers, marking the first time technology was used in the Peer-to-Peer (P2P) lending platform. When the 2007-2008 financial crisis occurred, banks’ lending to individuals and businesses shrank and consolidation among the traditional lenders and changes in lending capital reserves made access to liquidity extremely difficult. This scarce market created a huge debt-funding gap, resulting in many businesses following Zopa’s lead and launch their own P2P lending platform, providing momentum to this revolution.
Today, online market place lending refers to the segment of the market that uses investment capital and data driven platforms to lend, directly or indirectly, to consumers and small business. Though this initially emerged as P2P lending, whereby individual investors could lend to individual borrowers, this market has evolved. Today, the investor base for the online market place lenders has expanded to also include institutional investors, hedge funds and financial institutions.
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