IRISH BANKS GET a lot of grief – much of it deserved – for not lending enough money to cash-strapped startups and small businesses.

But for all the bank bashing, many small and medium enterprises (SMEs) are unaware that there is another, viable option for firms looking to grow.

That alternative is peer-to-peer finance, a billion-euro global industry which pairs potential investors with businesses in need of capital.

And according to Derek Butler, who heads Grid Finance, one of Ireland’s two crowd-lending platforms, the lack of recognition remains the major obstacle to getting more people to join the marketplace.

“We know that our model works and it works very well, so it’s about making more businesses aware of that,” he told TheJournal.ie. ”Frankly, not enough of them know about our system.”

In the US, the biggest platform, the Lending Club, has processed over $9 billion in loans to date, while in the UK the largest player, Zopa, has lent nearly £900 million.

If you benchmark Ireland internationally, we are a little bit behind the curve,” Butler said. “But even in the most-developed markets, it still is not mass-market.”

Grid Finance CEO Derek Butler and KC Peaches owner Katie Cantwell, whose business raised €55,000

How it works

The concept behind peer-to-peer lending is straightforward. Businesses apply for loans through a platform like Grid Finance, which went live last September, or its rival Linked Finance, launched in 2013.

Lenders propose the sums and interest rates they’re prepared to put on the table during an auction period. First preference goes to the cheapest bids, while the borrower ends up paying the average of all successful offers.

The lure for lenders is the interest return: an average of 7.5% through Grid Finance, compared to about 1% from a savings account.

Risks and rewards

But, like any investment, there are risks. Both Grid Finance and Linked Finance say they have strict screening processes for businesses, although there remained the danger that lenders could lose their money on deal.

However Butler said none of its borrowers had defaulted so far. ”The majority of our customers could access finance from a bank and I think that’s an important message to get across,” he said.

For borrowers, the big attraction is the ease of access to finance, as well as the opportunity to tap into their own customer networks.

Projects successfully funded so far through both platforms include well-known businesses like KC Peaches, Leo Burdock and Viking Splash Tours.

Grid Finance promises a response to loan applications within 48 hours – after which a successful project can go live for bids from lenders.

That compares to an average wait of eight weeks from application to draw-down from the banks, according to the latest Irish SME survey.

The catch

The trade-off is the amount of money the financing platforms keep in loan fees – and those sums can be hefty.

Linked Finance deducts 2.5% from the loan before delivering the money to borrowers, while Grid Finance’s fees are even higher at 5% of the loan total for a three-year agreement.

For now the industry remains unregulated, although both local operators have been calling for the Central Bank to include them in its oversight.

Nevertheless, the appetite for peer-to-peer finance appears strong. Linked Finance has set a target of €250 million in lending over the next three years, while Grid Finance is aiming for €100 million within the same period or less.

There’s a huge opportunity for us to disrupt a very traditional way of financing small businesses and there’s a great opportunity for us to do that in Ireland,” Butler said.

Here are 6 reasons Butler had for why people should get behind peer-to-peer finance:

For businesses

• Easy and fast: “We will give a business a quick decision, we won’t leave a business hanging around for weeks to say no.”
• Competitive on price: “The interest rate is very competitive – our average interest rate is 7.5%.”
• Tapping into customer networks: “The best lenders you can get for a project are those that know your business and typically you get a lower interest rate because of that.”

For individuals

• Good returns: Lenders can get up to 15% returns, although the average on most loans is below 10%
• Being in control: “There are very few active platforms in the world that allow you to decide your own returns.”
• Supporting local business: “People get a good kick out of supporting a local business and the positive social impact that comes from that.”

This month, as part of TheJournal.ie’s ongoing startup and small and medium enterprise (SME) focus, we are looking at peer-to-peer services and the sharing economy.

To view other stories from our collection, click here.

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