Peer to peer lending, including the type of business funding that people to business lenders like FundingKnight offer relies on matching up lots of individual lenders to fund one business loan. This maximises returns for lenders and helps make P2P Lending better value for all concerned compared to traditional bank business loans. Today, we explain how things work behind the scenes and why many lenders make light work.
My last post tackled the issue of interest rate spreads and the potentially tricky issue of financial literacy.
Money can easily become something that makes peoples head spin, so today, we’re carrying on with our straightforward explanation of how peer to peer lending works by explaining how lenders can club together to invest in healthy British businesses.
Something that can easily be mis-understood about peer to business lending is that a single loan made available to a borrower might actually be made up of lots, potentially hundreds, of individual lenders who all pool their funds together to finance the loan.
The process works roughly like this:
A borrower approaches a peer to business lender and applies for a loan. That loan application gets thoroughly checked and analysed by professionals and a decision is taken on whether or not to lend.
If things move forward, the loan will be made available to lenders via the marketplace. Those wishing to get involved add their money together with funds from other lenders and collectively stump up the loan that the borrower needs. All of the servicing and money transfers etc. are taken care of by the peer to business lending service who will also often commit to ongoing monitoring of how individual businesses are doing.
The more lenders that are involved in a loan, the more any risk is spread around and reduced.
In reality, of course, during the early days of any peer to peer lending service it will inevitably take time to grow the lending base. That’s why FundingKnight management will also be participating in all of our early loans.
That gives us a personal, as well as a professional interest in ensuring that our loans perform well.
We’ll also work with our initial lenders to ensure that each one of them understands the features of early lending via FundingKnight and is aware of the potential for concentration risk – which occurs when there are less loans available to spread your investment over.
We also have all sorts of plans in development for a secondary market that will help people buy and sell loan parts to help spread their risk or get easy access to their money.
These are exciting times as we put the finishing touches to the FundingKnight peer to peer lending proposition so please do sign up for regular blog updates and let us keep you posted as things progress, and, in the meantime, if there’s something else you’d like us to explain, simply drop us a line via the comment box below and we’ll do our best to help.