Peer-to-peer (P2P) lending has been growing in popularity around the world and is now really starting to take off in Ireland. Sometimes known as crowdfunding, the practice of matching individuals or businesses to lenders via online platforms started a little over a decade ago and is an attractive alternative to traditional lending.
With a reported £3bn lent to consumers and businesses in the United Kingdom in 2015, P2P lending is clearly becoming a mainstream option for businesses looking to raise cash. Here in Ireland, LinkedFinance and Grid Finance are the main P2P business lending platforms. We have worked with LinkedFinance for three years now, and a number of our clients have successfully raised money with them – as have we.
How does LinkedFinance work?
LinkedFinance offers peer-to-peer business loans to Irish SMEs. You can borrow between €5,000 and €250,000, at a fixed rate of interest (between 8.5% and 15%), for a term of up to three years. The loan is repayable in monthly instalments and you can get set up on their platform in a matter of minutes. The loan should be to help you grow your business in some way; for example, to improve your working capital, for asset finance, or some form of expansion capital. Your ‘Business profile’ allows you to attract lenders by answering the following questions:
- Tell us about your business and your plans for the future?
- Why are you safe to lend to?
- How will this loan make a difference to your business?
Once your loan request goes live on the site, bidding will commence. Typically, you have a two-week period to accept the loan offers, but they are generally funded faster than this. Once your loan is fully funded, you can accept the loan and have the funds within 24 hours. LinkedFinance is also looking at other funding mechanisms, such as invoice discounting, and there are plans to integrate with Xero – this would involve an integration that would be able to see what receivables are outstanding so they can lend against them.
How does Grid Finance work?
Grid Finance offers P2P lending along similar lines to LinkedFinance. They describe themselves as a “small business capital platform” for Irish SMEs. They offer term loans up to €150,000, over a maximum of 36 months. Repayments are fixed and made monthly. They also have a Cash Advance facility – a short-term finance solution for businesses with revenues from credit or debit card sales. You can borrow up to €150,000 over a maximum of 12 months, and repayments are directly linked to your merchant services receipts. Because they collect directly from the merchant services company (AIB, BOI, etc.), they’re financing your working capital and taking the repayments at source. This is a great financing tool for businesses in sectors such as retail, restaurants, etc.
Why P2P is a great option for SMEs
What we like about platforms such as LinkedFinance and Grid Finance is that there is finally an alternative funding solution for SMEs. It’s clear that banks don’t do enough to help small business… they may claim to be ready to lend to SMEs but it’s clear that they don’t do so nearly enough. Because SMEs typically don’t have much in the way of assets, they are still seen as high risk, and it’s very hard for them to get loans using the traditional channels. The “slow no” is a very real and recurrent issue for SMEs seeking funding from a bank. Not only do you have to jump through hoops just to make an application, but figures from ISME show that 36% of companies that applied for funding from a bank last year were refused credit.
Given that (if you are accepted) it can typically take two months or more to access funding via a bank, P2P lending is a far more attractive solution. Peer-to-peer lending makes sense for both SMEs and lenders. If you have 200 individuals/companies investing in your business, they aren’t basing their decision to lend on your collateral. They’re lending for other reasons, so if you can make a convincing case you are much more likely to raise funding this way. While LinkedFinance and Grid Finance are indigenous platforms, you could also look abroad for a P2P solution. The UK has been a strong adopter of such platforms, and we have several Irish clients who have successfully raised funding over there.
What about Microfinance Ireland?
Although not a peer-to-peer lender, Microfinance Ireland (MFI) is another option worth considering if traditional lenders are not an option. It’s a not-for-profit lender, established in 2012 to deliver the government’s Microenterprise Loan Fund. In 2016, Microfinance Ireland approved €5.4 million in loans to 397 Irish businesses. The government-backed initiative is aimed at companies with fewer than 10 employees and an annual turnover under €2 million (micro-businesses). You can borrow between €2,000 and €25,000 over three to five years and the interest rate is just 7.8%. You can apply if you are a sole trader, partnership or limited company – from any business sector. Microfinance Ireland is an excellent option for those companies that have been refused a loan from their bank and need a small unsecured business loan for a commercially viable reason. If you make your application with help from either an LEO (Local Enterprise Office) or Local Development Company, you can also get a 1% reduction in the interest rate. An added benefit of the Microfinance Ireland offer is that, once approved for a loan, you can access mentoring sessions through your local LEO. They offer three to five sessions with an experienced business mentor from the LEO panel. Microfinance is now able to lend via the LinkedFinance platform, as well.
Our own experience with P2P
Our own experience of peer-to-peer funding has so far been very positive – both for ourselves and for our clients. We have twice raised funding via the LinkedFinance platform; its speed, efficiency, and flexibility – plus the fact that there are no early settlement fees – made it the logical source of funding for our expansion (see the Linked Finance case study). We also have several clients who have used LinkedFinance or Grid Finance on our recommendation, and successfully raised their funding. Of course, as with any credit arrangement, you should carefully weigh the benefits and liabilities involved and ideally speak to a financial expert before going ahead. If you need additional support growing your business, there is a handy online guide to the 170+ government-backed schemes/programmes/funds available to startups and small businesses in Ireland. You can see what is available on the Supporting SMEs website. Loans are not the only way to raise capital. There are other options to look into if you are having cash flow issues. We have already looked at the benefits of invoice financing (also known as invoice factoring) and there are leasing arrangements that may help if you are simply looking to invest in equipment/office infrastructure.