The impact of the financial crisis on the availability of credit for consumers has been significant. But for businesses and entrepreneurs it has arguably been worse.
It is perhaps not surprising that banks have put even stricter limits on their lending to the commercial sector since 2008: after all, when the economy is performing sluggishly or unpredictably, it is the smaller firms who might be considered to be most at risk.
But the good news for businesses which need an injection of cash to take their operations to the next level, is that the peer-to-peer finance sector has stepped up to fill this gap.
Today, many entrepreneurs are as likely to seek a loan from a P2P lending platform or crowdfunding service as they are from a high-street bank.
Zopa itself offers loans at the smaller end of the business spectrum, to sole traders who are looking for some extra money to take their business to the next level.
With 3.5 million sole traders in the UK they can cover everyone from plumbers, to caterers, to hairdressers, to photographers, with many more professions and trades in between. P2P business loans allow owners a simpler application process and a much faster experience that takes the process down to a matter of weeks or even days, rather than months via a bank. This means entrepreneurs can access funds faster helping them grow their business all without having to go to see their bank manager.
As with the consumer P2P sector, the rates are one of the most attractive things about this kind of business finance.
The likes of FundingCircle, Market Invoice, Crowdcube and Seedrs provide finance to start-ups and established companies of all sizes. As well as taking on the banks, these services are increasingly competing with the likes of private equity firms and venture capitalists.
But bank lending to small businesses can be much more bureaucratic, slow and complicated than the process of obtaining a personal loan: this makes the P2P alternative even more attractive.
P2P has also benefited from public dissatisfaction with our major banks – scandals such as PPI mis-selling have made consumers more willing to seek rival lenders and homes for their cash. This applies equally in the business sector where, for example, a number of banks have been caught encouraging enterprise customers to sign up for complicated interest-rate derivatives that ended up losing them large amounts of cash.
One issue for business borrowers to bear in mind is that many P2P lenders – and banks for that matter – will only consider loans to entrepreneurs who have been established for a number of years, two in the case of Zopa.
This might seem like a Catch-22 on the face of it: you can’t get funding until you’ve proven you can run a business, but you can’t run a business until you get funding.
But today, setting up a company does not necessarily need a large cash investment: the overheads involved in doing business online, for example, can be very low. And technology means it is much more straightforward to operate from home, in the early days at least.
Saddling a start-up with debt from the outset can put more pressure on its finances: seeking cash to expand only once you know you can make a success of your firm could in many cases be a more sensible approach. Zopa along with the companies mentioned above form part of the Alternative Business Funding partnership, an online portal to help business owners find the right type of funding that is suitable to their businesses’ size and needs.