October 8, 2013 12:07 am

Peer-to-peer lending fills gap left by wary banks

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Six months ago, Gavin Armstrong, a civil engineer, asked his bank for an overdraft to set up his own business. It was a smart move: he has now made more than £1m in revenue and employs 26 people working on the drainage for the widening of the A11 in East Anglia.

But that was not achieved thanks to the bank, but is down to 30 individuals who decided to back his plans. A friend had referred him to rebuildingsociety.com, a peer-to-peer lending site that matches people with ideas to those with money to spare.

“I had never heard of it; I was a bit dubious,” he admits.

Mr Armstrong, 44, who had 17 years’ experience in construction but had taken a break to run a pub and nightclub, listed his reasons for wanting £50,000 and details about himself on the website.

He answered questions and waited. “Once the first person backed me it took just 10 days. I was sent a list of the lenders; some invested £10, others invested thousands. All these different people investing even though they don’t know me. It is a great idea.”

He borrowed the money over a year at 19 per cent interest but had to sign a debenture before people would commit.

“I would recommend it to other business people,” he says. “It is so quick and easy, [and] a very good idea for people who need a lifeline.”

Banks remain wary of the construction sector because of the losses it made during the credit crunch when building virtually ceased.

Yet that reluctance by the banks – net lending to business has been falling for several years – has opened up a new market. With interest rates so low, savers searching for returns are being matched directly with borrowers.

Since it began in 2005, the peer-to-peer lending industry has lent more than £600m. In the first half of this year it lent more than twice as much as the year before.

Funding Circle, one of the largest peer-to-peer lenders, arranged more than £50m in loans between January and June.

According to a report by the Open Data Institute, the market will be worth £1bn by 2016.

Sites are springing up almost weekly. Daniel Rajkumar, a computer science graduate, set up rebuildingsociety.com in 2011 in Leeds. It grew slowly but has lent more than £2m to 15 companies and has almost 5,000 users. The typical interest rate is 13 per cent, which goes to the lenders, while the borrower pays an additional arrangement fee of between 1.9-4.9 per cent, depending on the length of the loan.

“The rates will slowly decline as we get more lenders and more competition among lenders,” says Mr Rajkumar.

“People are really starting to understand it.”

It also can work for people seeking better returns for their capital. Suleman Akhtar, 49, a businessman from London, uses several peer-to-peer sites and has lent about £100,000. He says the key was to spread risk and his biggest single investment is £2,000.

“I am getting pretty much zero in the bank. I want to help British institutions and companies,” he adds.

As a qualified accountant he does his own due diligence. But he says many do not and are often caught up in heated online auctions for popular loans, which can be filled in minutes on the larger sites.

“A lot of people doing this don’t have a clue what they are doing. You just hope they are not putting in too much,” he says.

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