Sunil Kumar, a garment trader in Surat, is in a fix. He’s enterprising and wants to expand his business. But he needs a fresh infusion of funds to grow his distribution network. All his funds right now are tied up to fuel his working capital. As a result, his balance sheet doesn’t show much, affecting his prospects of a bank loan. Not to mention the high interest rates and, all the documentation. If you identify with Sunil Kumar and the challenges he is facing, this is for you. The answer to Sunil’s problems lies in Peer-to-Peer (P2P) lending.
What is P2P lending?
Individuals, who are looking to invest, lend money to peers or small businesses via P2P companies such as banks and Non-Banking Financial Companies (NBFCs).
Online P2P lending platforms match with borrowers such as Sunil Kumar for a mutually beneficial transaction. This method of debt financing is also known as ‘crowdlending’.
RBI to regulate P2P lending
On 11th June 2018, the Indian government said it will regulate P2P lending platforms. Once the guidelines come into play, these platforms will be treated as NBFCs.
According to the central bank, even though P2P companies are still in the budding stage and haven’t become mainstream yet, the benefits they provide to borrowers, lenders, and the company itself are too big to ignore. It has the potential to disrupt the financial system and hence needs to be regulated. This can be a good move as it will safeguard the lender’s interest better and ensure borrowers don’t default on loans.
Why it works for lenders
- Lenders get a higher return on their investment as compared to a traditional investment vehicle such as a fixed deposit or mutual fund.
- The returns are high, but so are the risks. P2P companies are putting measures in place to safeguard investments.
Why it works for borrowers
- Loans from a bank or NBFC come with an interest rate as high as 20%, which can cost a business dearly.
- P2P borrowers can get a loan at a much lower interest rate.
Traditional loans come with their set of challenges
Getting a loan from a bank or NBFC is not easy for a small business. It takes time to process. Small businesses also need to provide a long list of documents to prove their creditworthiness. The chances of rejection are high. Not to forget the high interest rates.
Application for a bank/NBFC loan can be affected by:
- Weak personal credit score
- Massive documentation
- Ups and downs in business profitability
- Lack of liquid capital
- Financial setbacks
- Credit card loan
- Complex and lengthy procedure
- Need for a guarantor
- High rejection rate
How can P2P lending help your small businesses?
The entire banking system depends on your credit score. If you have a bad score, no bank or NBFC will touch you.
The good news is that P2P platforms do not bank on your credit score – pun intended. P2P platforms use their own data points and algorithms to evaluate the credit standing of borrowers.
Benefits of P2P financing
Easy application process: You can apply from anywhere in the world using a computer and internet connection. It takes a few minutes and you don’t have to submit multiple financial documents.
Lower interest rate: You can get a loan for a much lower interest rate than a traditional loan.
Flexible return options: There are multiple options for returning the loan. You can choose what is most suitable for you.
Faster loans: Loan approval and disbursement is quick.
Larger amounts of funding: P2P financing opens many doors for you to get a larger loan.
How to apply for P2P financing
Applying for a P2P loan is quick and easy. Though every platform has a slightly different procedure, here’s a broad blueprint on how you can get one.
- Register yourself on a P2P lending platform – this should not take more than a few minutes.
- Certify your profile – this is not mandatory, but sites help you get your profile verified and rated to build investor trust. This ensures better response.
- Reach out to investors – you can bid to investors by sharing your business plan
- Get your loan approved – once you find a keen investor, getting an approval is quick
- The money comes to your account – loan disbursement usually takes 72 hours or less!
If your business needs a boost, study all the options you have. If a loan is the only route open to you, consider P2P financing. Understand how much you need by way of a loan and if you can repay it easily. Evaluate and compare the many P2P companies in India and go with the one that seems the best fit.
Instamojo has a lending program open for Instamojo users only. Interested? Click here and we’ll have someone from the team reach out to you.