Peer-to-peer lending (P2P) has been one of the UK’s fastest-growing financial services sectors in recent years. In simple terms, it offers online platforms where business owners can borrow money (repaying with interest) from people willing to lend it. This can be a powerful way to gain funding quickly – perhaps within days – and without involving the more stringent checks imposed by traditional banks. In this latest industry report, we take a look at the state of P2P lending in 2022. This includes past and current trends, new and major players, opportunities and risks for investors to consider over the months and years ahead.
The P2P landscape in 2022
In 2022, the total P2P market size in the UK (measured by revenue) is estimated at around £283m. Over the last 5 years, the industry has grown 24.3% per year, on average. Between the start of 2005 (when Zopa Ltd started the P2P industry) and Q1 of 2019, cumulative origination volumes grew at a compound annual growth rate of 175%.
Part of this growth can be attributed to more platforms attracting capital from institutions as well as retail investors. However, the P2P landscape has also become more competitive – leading to higher pressure rates and incentives to lower underwriting standards. Regulators like the FCA have placed greater scrutiny on P2P platforms over concerns about “hidden risks” and impulsive investor behaviour. This has led some companies to exit the market entirely – such as Zopa, which shut down its P2P platform in December 2021 to focus on banking.
However, with this said, P2P is still growing at a rapid rate in the UK in 2022. The FCA has also not indicated any desire to shut down this major source of jobs and business investment. Rather the industry needs to work within its new rules, designed to “Prevent harm to investors, without stifling innovation.”
Major players & new entrants
The UK has grown in its range of P2P platforms in recent years – up from the sole provider Zopa in 2005. Today, the leading player is Funding Circle, with a total loan book value of £8.3bn. The business was founded in 2010 and is steadily incorporating machine learning into how it offers finance to small businesses. Other important players include:
- LendInvest (£3bn).
- Assetz Capital (£1.4bn).
- Folk2Folk (£460m).
More specifically, certain P2P platforms have chosen to focus on real estate in the investment projects they offer to investors. These include:
- Property Partner. Founded in 2014, this platform lets you invest in real estate with as little as £1,000.
- CapitalRise. A provider of property development loans launched in 2016.
- BridgeCrowd. A specialist in bridge loans, secured by UK property.
One of the benefits of P2P lending in 2022 is the wide range of platforms on offer. For business owners, this makes it easier to find a lender meeting your requirements. P2P also opens the doors to both small and large loans – so you don’t need to borrow too much/little for your needs. Owners also do not need to surrender control of their business when borrowing, and the whole process is usually fairly quick and straightforward.
For investors, P2P lending opens the opportunity to access higher potential returns compared to those offered by equity/bond funds. Risk levels can also be adjusted according to the investor’s tolerance/preference. Many platforms also offer contingency funds to help compensate people who loan money to a business which fails. Finally, if investors use a tax-efficient “wrapper” like the Innovative Finance ISA, returns can be protected from capital gains tax (CGT).
For borrowers, there is always the risk that you may not repay your loan(s) on a P2P platform. Also, interest rates can be higher when compared to standard business loans (due to the higher perceived risk involved). Your credit report may be affected, since lenders undergo credit checks before committing capital and this may highlight missed/late repayments. Business owners need to think carefully about how much they want to borrow, the loan term (i.e. how long to take the loan out for) and how they intend to use the money.
One of the main drawbacks of P2P investing is that any loans you make are not covered by the Financial Services Compensation Scheme (FSCS). If the P2P platform goes bust, therefore, then what you’ve invested through it may not be returned to you (e.g. if there are no assets left after the business’s main liabilities are paid). There is also the risk that a business you lend capital to repays the loan early – resulting in lower returns that you otherwise could have made.
Investors may also face liquidity problems if they want to pull their money out of a platform. This is because the loans you make need to be seen through to completion (unless you can arrange otherwise with the borrower). It may be possible to get another lender to buy your loan(s) off you, but this is not guaranteed. The process may take time and involve a fee.
Investors should weigh different P2P platforms – and their investments – carefully in light of the specific risks and benefits involved, as well as considering the investor’s risk tolerance, financial goals and investment horizon.
If you are interested in expanding your portfolio into these kinds of exciting spheres of investing, then we invite you to get in touch with us here at Bure Valley and to consider joining our exclusive investor network:
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