Conducting Due Diligence: The Risks Of Alternative Lending

section signP2P (peer-to-peer) lending is one of the fastest growing markets in the UK. Breaking record after record for amounts lent year after year, savers and investors who have discovered the various online alternative lending platforms have been enjoying some high returns on their ventures now for some time.

Indeed, 2015 seems to be the year that alternative finance has finally arrived, despite the reality being that such platforms have been around for years. Appearing, as it does, to be the new kid on the block, by the end of 2015, online alternative funding platforms will have actually lent a combined total of £4.4 billion – and that hasn’t just happened over night.

The industry started making waves back in 2010, and has gradually gathered speed since then. At this early time, the alternative finance sector was hardly on the regulator’s radar at all – and it was only last year that the FCA introduced a range of new regulation in the P2P sector.

So the question surely has to be – how safe is P2P lending?

John Ficenec attempts to answer this very question in a recent article in The Telegraph:

“The peer-to-peer lending websites are typically providing unsecured credit for car loans, home improvements and to pay off other credit card debts. There is no guarantee that the money will be repaid and any funds lent through the websites are not covered by the Government-backed Financial Services Compensation Scheme, which protects bank savers up to £75,000.”

Despite this, Ficenec goes on to note that in spite of the risks, the industry so far has an excellent track record. But without guarantees, this will only last for so long, and eventually a borrower or a lender will have a bad experience (or worse), and it will be then that complaints start flooding in – and a much tougher approach from the FCA.

Indeed, complacency is perhaps the biggest threat to P2P lenders at present, and the various financing platforms will do well to ensure that they don’t allow themselves to fall into this trap.

‘Due dilligence’ is the term that should be on the lips of every compliance officer of every platform. The Route – Finance’s most recent investment – the lending of £875,000 to developer for the rehabilitation of brownfield site – was only conducted after vigorous rounds of due diligence, designed to ensure that the borrower was fully capable of generating income from the loan, had asset security against it, and a good exit plan.

In fact, the prospect turned out to be so secure, that the raise was oversubscribed by Route Members.

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