2nd June 2015
With all the opportunities in crowdfunding these days, it can be interesting and rewarding to understand how peer-to-peer loans and investments work. There are a number of different models, but they revolve around the concept of using the internet to link people who have money to people in need of money.
The earliest forms of peer-to-peer transactions were philanthropic – merely introducing people with a great idea to people who wanted to see it come to fruition badly enough to contribute to its development. These nominal contributions can add up to enough funds to get an idea off the ground – often taking the form of micro-sponsorship of artistic events like theatre productions, films, or similar. These types of fundraises were made popular by sites like Kickstarter and Indiegogo, and are generally referred to as “crowdfunding” raises, which differentiates these sorts of raises from investment funding.
Modern peer-to-peer investing works on almost the same principle, and also includes a range of different forms and investment strategies. Broadly speaking, they can be divided into equity, or debt investments;
Equity investments through peer-to-peer (commonly denoted “P2P”) generally involve early-stage or start-up businesses seeking investment in order to bring a product to market or build the business. By making a contribution you become a shareholder in the business, and are then eligible for capital gains if the business becomes a success. The idea is that the business intends to exit at a point in the future, either through an Initial Public Offering or a trade sale to a bigger company, which will give investors the opportunity to sell your ownership at a higher price than was paid for it. In the UK these investments are often eligible for lucrative tax benefits under the Enterprise Investment Scheme or Seed Enterprise Investment Scheme – you should always inquire if the investment will be eligible, because these schemes allow the investor to reduce income tax bills, avoid capital gains taxes, or reclaim any losses. The specifics of these schemes is best left to a separate discussion.
Debt investments through peer-to-peer (P2P) platforms give the investor a chance to lend money directly to small and medium businesses – in essence they allowing private investors to be the bank, specifying their own interest rate for contributions as small as £20. A £20 loan to a small business doesn’t sound like much, but when coupled with a crowd of your peers, the result has been individual business loans of up to £1 million.
P2P loans are serious business – across the UK it’s estimated that P2P loans amounted to over £1 billion in 2014. In the US in December, the biggest P2P platform – Lending Club - launched an initial public offering on the NASDAQ at a US$5 billion valuation, quickly spiking to US$9 billion on opening day.
Whether it’s contributing to interesting projects or geeky gadgets, or tucking money aside and earning a sound return, the internet has created opportunities for every type of saver.
