Are Peer to Peer business loans more expensive than business bank loans?
History of Peer to Peer lending
Less than twelve years ago, Peer to Peer lending did not exist in the UK. All of a sudden, Peer to Peer lenders such as Zopa and Funding Circle are a major competitor to the traditional High Street banks for business loans.
Peer to Peer lending covers not just personal or business loans, but invoice discounting and crowd funding for share capital. But are they cheaper than a bank?
What’s cheaper, Peer to Peer business loans or bank business loans?
As a generalisation, your traditional bank loan is still the cheapest option. Funding Circle quote rates from 4.5%, but the reality is that most loans we arrange via Funding Circle are for much higher interest rates. On average, I would say that a Peer to Peer lender would charge 9%. Note, that is before they add on their fee. What Funding Circle do is to add on their fee which could be 4% of the capital amount. Hence, if you want to net a £100,000.00 loan, you are actually borrowing £104,000.00 and paying back interest on that figure, not £100,000.00
Bank rates still normally work as a percentage above base rate. With base rates at .5%, some banks are offering loans at 2.5%. However, the norm would be 4.5% upwards. Both High Street Banks and Peer to Peer business loan lenders sometimes charge a facility (documentation) fee. The interest rate spread will be much greater with Peer to Peer lenders compared to a bank.
If Peer to Peer Business loans are more expensive than bank loans, why do companies use PEP lenders?
Funding Circle alone has lent over £3bn to 30,000 plus customers, and that is before you take into account Rate Setter, Boost Capital and all the other P2P lending companies. The facts are simple, Peer to Peer business loans on average are easier and quicker to get than a bank loan. We have seen lots of occasions where a High Street bank will lend maximum £25,000.00 but a P2P lender will lend £250,000.00
Compare a bank loan at 5% to a Peer to Peer loan at 10%
What’s the difference in interest payable when comparing a 5% interest rate to a 10% interest rate on a business loan.
Interest Rate 5% 10%
Business Loan £100,000.00
Term 3 years
Repayments 36 monthly repayments
Monthly repayment £2,984.65 £3,200.05
Total repaid £107,447.53 £115,201.86
In summary, on a £100,000.00 loan, the difference between a 5% and 10% interest rate is £7,754.33 or £2,584.78 per year.
The unbiased view
If your bank is prepared to offer you a bank loan and you know your company has no further need for bank lending for the duration of the loan, then a bank loan from a High Street lender will definitely be cheaper that a Peer to Peer Loan. Saying that, for the reasons discussed above, we know non-bank lending is only set to rise over the next few years.
Please give WestWon a call to discuss your business loans needs on 01494 611 456.
