Over the past couple of years, peer-to-peer (P2P) lending has become an excellent alternative source of business financing, especially for SMEs and start-ups. With peer-to-peer lending, SMEs and start-ups can gain the funding they need for business development. Not only that, peer-to-peer lending is attractive to investors too, with its high returns and easy concept. However, with the rise of peer-to-peer lending, some myths have attached themselves to the concept. Want to separate fact and fiction? Here are some myths and misconceptions about peer-to-peer lending, along with the reality.
“You need a lot of money to get started”
False. In fact, one of peer-to-peer lending’s key advantages is its low entry barriers. Take our investment product, for example. With a S$1000 minimum first deposit at Funding Societies, you can start investing – and for better diversification, you can invest S$100 into ten loans each. You don’t need much to get started at all.
As a P2P investor, you also have flexibility as you are able to choose from the loans provided. You get to pick whichever loan has the tenor and interest rate that appeals to you most.
“It’s not a mainstream investment”
It depends on what you think of as “mainstream.” Yes, P2P lending as a concept has gained traction only recently, but there’s really nothing new about a business model where investors pool together the amount needed for a loan requested by a borrower. But these days, P2P lending activities are easier to facilitate thanks to online platforms and digital technology.
“There are no regulations for peer-to-peer lending”
One of the typical misconceptions about peer-to-peer lending is that the model is not yet regulated so investing in P2P lending or borrowing from a P2P platform can be risky. But it really depends on the region and country. In Singapore, MAS (Monetary Authority of Singapore) has issued a framework for the P2P lending model. Look for a local P2P lending platform that has been licensed!
“Peer-to-peer lending is crowdfunding”
Not really, but it’s easy to make the mistake. After all, peer-to-peer lending is a category of crowdfunding. Certain principles are the same, but there are a few differences between the two concepts. Crowdfunding pools resources from multiple individuals to gather financing for a particular project, perhaps a creative project or the creation of a product. Sometimes the individuals who help pitch in money for a crowdfunding campaign get rewarded with gifts and sometimes there are no physical rewards, similar to a donation.
Peer-to-peer lending, in the meantime, operates more like a lending and borrowing model. Investors and borrowers are connected through an online facilitator. Together, investors pool together finances for borrowers. The borrower will use the disbursed loan and repay his investors with interest.
“If you lend money on a P2P platform, it will be locked for a fixed period”
Well, yes. A P2P investor is asked to commit funds for a fixed period, but for a shorter period than most other investments. On our platform, loan tenures range from 3 to 24 months, which compares favourably to other instruments.
We hope the above has dispelled some of the tangles and confusion. With its advantages, P2P lending is an attractive solution for both investor and borrowers. Do you agree?
This article was contributed by Funding Societies.
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