Peer to Peer Lending: Emerging Role in Startup Ecosystem
- BY Akshay Arora
Feature Writer, BusinessEx
- Dec 12,2017
- 9 Mins Read
Peer to peer lending is considered under debt financing as it is a kind of loan that one needs to pay back after a given time. This is becoming as a most favourable source of financing in the emerging startup ecosystem. With enhancing competition in all the industries, the need for financing is also increasing among the startups and small business.
A common barrier that stops a startup growth is financing which can be solved through peer to peer lending. To know why this is a good option we need to understand how it started in the first place. In India, the general way of lending is either banks or financial institutions, which follows strict criteria of background check, the capability of returning the amount in the fixed period, security and high-interest rates. In many cases, startups are unable to match up to the required procedure and not get funding but that doesn’t mean that they will shut down their business. Now peer to peer lending evolves which is the rejected startups try to seek out to private lenders for financing.
Now this private lending does not involve any middleman or any official financial institution to make the transaction. It is sort of a crowdfunding that offers unsecured loans to individuals. But this kind of transaction is riskier as compared to other ways of lending.
Let’s see the pros and cons or P2P lending for better understanding.
Pros of Peer to Peer Lending:
- This way brings ease in the lending process as any startup can get this without fulfilling the harsh criteria of banks and financial institutions. P2P lenders even help in the bad times of a business with funding.
- The lenders also attract startups by offering less interest as compared to other lenders. Lenders do this because they still get a higher return on investment as compared to investing in the stock exchange. It is a win-win situation for both the parties.
- As startups are in beginning phase they don’t have security to offer in exchange and get rejected by banks but these lenders not always ask for security is if they see potential in your business.
- Lenders have the benefit of diversifying their funds among different borrowers as there is no government entity involves in the process.
Cons of Peer to Peer Lending:
- In this type of lending with an increase in benefits, risk also increases. As there is no role of government then lenders have the power to take as much interest as they want and can get you to sign a contract which is more favourable to them.
- Generally, these lenders offer the funds for a limited time constraint in which the startup needs to repay the amount or a part of it with interest.
- In many cases, a startup cannot get the required amount of funding from one lender so they approach multiple lenders to accumulate the required amount. This leads to multiple risks for a startup if the revenue is not generated as per the expectations.
This decision solely depends on you whether to go for it or not. One thing to keep in mind is, it is better to approach them through a recognised platform like BusinessEx which offers you a space to interact with lenders, investors and other business associates as per your requirement. This is a better approach because this platform protects from networking with wrong lenders.
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