How can peer-to-peer lending platforms help small businesses access capital?

P2P also doesnt have to be online. In my country, people do what they call ajo or esusu.These are traditional forms of savings and lending from one person to another. The fundamental criteria that are checked are capacity and character. It has proven to be highly successful over the years in helping household and businesses with access to finance.

In nearly 30 years of helping people find funding for anything from their first car, their first home, their forever home through to multi million dollar luxury yachts, I've never seen a time when their was so much money available yet inaccessible to most people. The P2P environment in NZ is very young, relative to the rest of the world, so utilising the available platforms here in NZ is not something that has become common practise, to date, but in the utopian world of forecasts, I can see how this type of platform could be a game changer for some people, as they struggle to find the start up capital to get a business underway let alone the money to employ advisers who could help them navigate the very murky waters of a start up business.

One of the key advantages is familiarity and relatedness. If you are a small business owner, the best person who knows what you need to go through is...another small business owner! P2P lending can unlock value by connecting a successful individual with company in a sector they know very well - much better than any banker will know.

A think I need to highlight is that P2P lending is generally riskier than other investment for 3 reasons: 1. Most small businesses fail after two years 2. It is difficult to diversify geographically: usually P2P lending are concentrated in a city / region and can be impacted by a downturn at the same time 3. It is difficult not to be concentrated: each loan cam be be 10k usd or more, so you need a large investment to diversify

Investors usually have only one criteria when choosing their investments, and that is the expected return rate of the project. The problem with that idea is ignoring the global risk of the portfolio as well as excessive concentration of assets. This is why P2P platforms are dangerous for investors that don't take the risk of the application into consideration. P2P platforms are great for both parties when used responsibly though.

P2P can be a highly risky investment especially in developing countries where individual's data are not readily available for proper credit analysis.Investors might end up losing their funds due to the client being over exposed or not having the capacity to pay even from the point of application.

It is all about disclosure: to make a P2P platform successful, you need to mandate a miminum amount of standard data points that each potential borrower has to submit. It needs to be something simple that most people can do, but good enough to provide information.

One way to also improve these platforms is to recognize that they are a significant contributor to economic growth due to the level of customers they serve. Hence, policies and investments from Governments should be channeled towards enhancing them to the level where they grow to perform similar roles to big financial institutions. They are a key part of the financial supply chain of a country.