Peer to peer lending 

 

What is peer-to-peer lending in Australia? Is it a suitable commercial finance alternative to the bank and other traditional lenders?

How are borrowers and investors protected, and how does P2P lending work? 

 

What is a peer to peer lending in Australia? 

 

Peer-to-peer lending in Australia is typically carried out on digital platforms, but that’s not always the case. P2P lending allows businesses that need a capital injection – to drive growth or for a multitude of reasons, such as buying plant and machinery, stock, equipment, or moving to bigger premises – to connect with investors, usually via a website with a predetermined set of conditions and rules in place. 

 

Businesses that use peer-to-peer lending investment can bypass banks and traditional lenders. However, the digital P2P platform will apply a strict set of criteria for borrowing typically in place no matter which investor a borrower connects with, although that’s not exclusively the case. Investors who use peer-to-peer lending often view it as an alternative to saving with a bank or investing in ethical activity.  

 

P2P lending in Australia works in much the same way as traditional forms of finance. Borrowers sign up for property investment loans, construction loans, asset finance, or cash flow funding and repay it over a set term with interest. 

 

Many Australian investors and business owners perhaps don’t realize that there are alternatives to P2P lending marketplaces. The source of funds on peer-to-peer lending platforms is essentially a managed fund from a pool of small investors. Private mortgage managers operate in much the same way as peer-to-peer lenders, often providing a more direct, tailored route to funding. This article will examine how Australian P2P lending platforms work for investors and borrowers and consider the advantages of connecting with a private mortgage manager instead. 

 

Peer to peer lending for investors: 

Peer-to-peer lending for investors is relatively simple. Before anyone can borrow money, the platform will carry out credit and eligibility checks, with varying rules and criteria applied by different operators. Media also take care of loan approvals and manage repayments during the loan term. 

 

On the upside, borrowers can typically get a cheaper loan than a bank, and investors can earn more interest than they would from a bank. The lending platform also wins because it takes fees. 

 

Different rules may apply when investing on peer-to-peer lending investment platforms. For instance, one or two websites will allow investors to decide which loans they fund. Other platforms will make such investment decisions themselves. Either way, investors choose how much money they want to commit, and different media have various minimum investment requirements, ranging from a few hundred dollars to tens of thousands. 

 

Some but not all platforms will allow investors to specify loan periods that suit their needs. They may also permit investors to choose a minimum interest rate. Investors receive returns regularly during the loan or in a lump sum at the end of the term. The P2P platform takes a slice of the proceeds. 

 

The main plus with peer-to-peer lending for investors is the returns. If all goes well, interest rates on P2P platforms may represent significantly better value than some traditional forms of investment. Many investors also like the fact they can connect almost directly with borrowers and feel that their money is growing while borrowers who need a loan can access funding. 

 

There’s a particular risk with peer-to-peer lending for investors on the downside. Many peer to peer loans are unsecured, and the level of exposure isn’t always immediately apparent by the platform, which mediates agreements between the lending and borrowing parties. It’s also worth remembering that investors shoulder all of the lending risks in a peer-to-peer lending investment situation. For platforms, the chances are pretty much non-existent. 

 

In reality, P2P results can fluctuate. For example, if a borrower experiences unexpected challenges during the term, it could become extended and diminish investor returns. P2P platforms also don’t enjoy the same government guarantees for funds as banks. In the case of fraud or a mistake on behalf of the platform, investors can lose part of their money or everything. 

 

What is a peer to peer lending in Australia? Business borrowers 

Peer-to-peer lending has become relatively popular with business borrowers in Australia. Platforms offer a certain amount of speed and convenience, connecting business owners with willing investors. Everything from registering to accessing funds is quick compared to banks and traditional commercial lenders. 

 

P2P marketplaces also cover everything from short-term loans repaid over a few months to longer-term borrowing. Like when borrowing from a bank, you’ll likely need to be a company director, although a P2P platform may not require a minimum trading period. Again, as with traditional lending, interest rates are based on risk. You may find it easier to qualify for a P2P loan but pay a higher rate. Funding can come from a single investor, or the platform may group several investors to fund your borrowing, 

 

That’s perhaps the main difference between a bank and a P2P lender. Funds are sourced via a panel, which essentially acts like a fund managed by the platform.  

 

Alternatives to peer to peer lending in Australia: Private mortgage managers 

Peer-to-peer lending might not be the best solution for all borrowers. While you can typically apply irrespective of the time you’ve been trading, the size of your organization and its annual turnover, the generic nature of P2P investors could short-change borrowers with specific advantages. 

 

That’s not to say all borrowers should avoid peer-to-peer lending. However, it’s worth noting that the rise in popularity of P2P platforms is partly due to increased regulation of traditional lenders. There is typically a cost to pay for added convenience and easier qualification. Despite that, P2P is used by several types of commercial borrowers:
 

  • Start-ups: Often have little joy when applying for funding with banks and traditional lenders that require a minimum trading period and often need to see several years’ worth of accounts and tax records before approving a loan. The downside for P2P start-ups is usually a higher interest rate.  

 

  • SMEs: Many SMEs enjoy that solutions like invoice financing and smaller commercial loans are widely available on P2P platforms. Cash flow can be a significant issue for growing organizations in this bracket. Again, the downside is usually higher interest rates.  

 

  • Businesses that rent or don’t require premises: Traditional commercial borrowing is typically more challenging without collateral. Because many P2P loans are unsecured or based on accounts receivable, they’re often an easy option for asset-poor businesses or business owners who don’t have equity in personal property.  

 

Peer to peer lending in Australia: Using assets and equity to fund business growth 

The fact is a peer-to-peer lending investment isn’t anything new. Private mortgage managers have been connecting investors with borrowers for a long time. The main difference between private mortgage managers like Agility and P2P operators is that investors tend to specialize in business growth or construction finance. Private mortgage managers know the preferences of each investor and develop long-term relationships. 

 

For that reason, and unlike with P2P lending, commercial finance solutions can be tailored specifically to client and investor needs. The process is also a little more seamless, with private mortgage managers highly experienced at assessing commercial borrowing proposals based on their strengths. Many borrowers also enjoy that private mortgage managers are real people and will often acquire specialist knowledge in property development, construction, or business growth. 

 

That means, while peer to peer lending investment and borrowing can provide a route to finance for some businesses, asset-rich organizations and operators with equity in the property, or companies who buy land or premises, a more specialized solution will likely be more cost-effective: 

 

Property development and construction finance 

 

Flexible construction finance is based on the gross realization value of projects. Private mortgage managers look at end value and assess projects on merit rather than just considering the total development costs and lending a percentage.  

 

  • Construction finance solutions: As a result, builders and developers can often access an end-to-end funding solution that covers more of the total land and build costs. Construction loans also come with fewer requirements for equity and more periodic time-consuming inspections during construction.  

 

  • Agility is a construction finance specialist. Projects are evaluated with a firm eye on their potential. We look at everything from how experienced a developer is to demand the proposed property type in the neighbourhood. Project strengths allow us to arrange a tailored, cost-effective solution.  

 

  • Property developers and DA applications: Property developers can often unlock the value in equity resulting from a lengthy DA application. Whereas banks and P2P lenders don’t have the expertise to evaluate such gains, at Agility, we work with enough developers to know it’s a valuable asset. 

 

  • If you’ve been sitting on a block for a few years while you gained DA approval, chances are it’s appreciated. Private mortgage managers can help you use that equity to get your project off the ground quicker. 

 

  • Residual stock value: Lending can often cause problems at the end of construction or development projects. Whereas the end of a bank or P2P construction loan could see you scrambling to reduce stock to exit your current project and get a new one underway, specialist private mortgage managers offer more developer-specific solutions. At Agility, we help builders and property developers unlock the equity in newly built stock, like apartments, offices, and houses, to fund marketing efforts and get new projects underway.   

 

  • Some construction and development projects can severely compromise ROI due to ineffective, inflexible lending. You’ll likely achieve better prices if you’ve constructed high-end stock once they’re completed. Banks and other lenders often demand high pre-sales, meaning you need to market off the plan, leading to lower profits. Many specialist investors demand fewer requirements for pre-sales and less pressure to sell stock at the end of a project. 

 

Private mortgage managers and business expansion funding 

 

Many business owners have considerable equity in personal or commercial property. They may also have significant business assets like plants and machinery. These asset types can be used to source more cost-effective specialist commercial finance. 

 

  • Use the equity in your home or business premises to fund development: You can use residential or commercial property to support business expansion. It can help reduce costs, whether you’ve outgrown your current manufacturing facility, you need to add a new store to your portfolio, or you want a bigger office in a more convenient location. At Agility, we can help you unlock commercial or personal property value to fund business growth.  

 

 

 

 

 

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