Peer-to-peer lending started in the USA in 2005 and today has grown into a multi-billion pound industry across the world. In the UK, peer-to-peer (P2P) lending businesses emerged about 10 years ago, bringing borrowers and lenders together directly. They challenged traditional banks, which were reluctant to lend to small companies and whose interest rates for savers were often below inflation.
P2P swiftly became popular with both lenders and borrowers, since they give both parties a better deal: lenders receive more interest than they would get from a bank savings account, while borrowers can finance their growth quickly and easily and pay less than on a bank loan.
P2P lending platforms can afford to give much better deals than banks simply because they have much lower overhead costs than traditional lenders. For example, P2P platforms have no branch networks, expensive legacy IT systems, high cost city offices, huge staff base and some don’t have any intermediary costs. The technology, systems and processes are purpose built and efficient.
In 2017 alone the UK P2P industry lent £3.7 billion and has grown at over 70% per year over the last 3 years, largely by taking share from traditional lending institutions due to this cost advantage.
P2P platforms work by charging borrowers both interest and fees on the loans they receive. Lenders typically don’t pay fees and receive interest on money lent, backed by varying levels of security. In the case of CrowdProperty investors are paid a fixed 8% interest on completion of any of the project(s) they have chosen to lend to. CrowdProperty is paid by the borrower for financing their project(s). To protect lenders’ funds, CrowdProperty always takes 1st charge security on the property asset – which is the same security and rights that a mortgage company takes on a residential home.
The UK Government recognises the significance of the peer-to-peer industry in boosting the UK economy and in 2012, invested £20 million into British businesses via peer-to-peer lenders, to make up for the lack of support by traditional banks. A second investment of £40 million was announced in 2014.
Using online technology, P2P lenders have enabled investors to lend money to a wide range of types of businesses and individuals. According to both the Cambridge Centre for Alternative Finance (Entrenching Innovation Report, December 2017) and Altfi Data, the largest growth area within P2P lending is property lending, showing a rise of 80%+ growth year on year over the last 3 years.
As part of this pioneering industry, CrowdProperty is a completely independent marketplace, and at the forefront of work to finance the residential property development sector, to date funding the development of 260 homes.
Neil Faulkner, founder of P2P analyst ‘4th Way’ says that P2P sits between savings and shares in terms of the risks and rewards on offer. In Moneywise (August 2017) he writes: "P2P is a great middle ground between savings and the stock market. The risks associated with P2P are lower than the stock market and you can invest for shorter periods of time whilst earning higher interest than a savings account."
In April 2016 the Government launched the Innovative Finance Individual Savings Account (IFISA), which enabled P2P companies to offer their investors tax advantages on the interest they were making from lending. In 2016, £80bn was invested in ISAs, creating a significant opportunity for P2P platforms. By January 2017, 17 P2P providers were approved to offer the product.
Since April 2014, the peer-to-peer lending industry has been regulated by the Financial Conduct Authority (FCA) to increase accountability with standard reporting and facilitate the growth of the sector. Peer-to-peer investments do not qualify for protection from the Financial Services Compensation Scheme (FSCS), which will pay out £85,000 to each saver if their bank fails, but FCA regulations mandate that peer-to-peer companies must implement arrangements to ensure the servicing of the loans even if the platform goes bust.
CrowdProperty, for instance, has a back-up service provider agreed, who, in the unlikely event that the platform failed, would take the company’s place in operationally managing and administering existing loan contracts between borrowers and investors. The first legal charge that CrowdProperty takes out on all properties would also continue to stand and protect investors’ funds if any project developer was to default on repayments.