Peer To Peer Lending:
Investors Need To Be Aware Of Risk

The peer to peer sector has been rapidly expanding as more people learn about the scope of opportunity it offers. Driven by the ever increasing number of investors, crowdfunding and peer to peer lending websites have opened to accommodate them.

More and more newly formed businesses searching for funds to grow are now turning towards equity crowdfunding or fixed return peer to peer lending platforms which mediate the transaction between borrowers and investors. This gives new businesses an alternative to mainstream banks and allows the community to fund their local businesses with the potential for profit.

Recently, however, suspicions have arisen as to whether or not the investment risks are being appropriately represented. Inflated valuations of the business, for example, increase the risk of an investment opportunity relative to the potential rewards, meaning that the investors could be unknowingly investing in an opportunity with a high risk-to-reward ratio. Additionally, there has been some debate about whether companies have adequate protection against some of the risks inherent in business, such as strong dilution of their shareholdings.

The FCA (Financial Conduct Authority) has stated that investors need to be aware of these risks, and say that investors are likely to lose all their money as most new businesses fail.

Although crowdfunding can be a great way to kick-start the expansion of your business, it’s not always easy, particularly if you’re unable to justify the amount you pitch for. Crowdcube, an online equity crowdfunding platform, reject 85% of businesses that apply for just such reasons.

Peer To Peer Lending: Investors Need To Be Aware Of Risk

As the crowdfunding sector is still relatively new, it falls under heavy scrutiny and any failings will be quickly noted. The sector has received support from Stian Westlake, executive director of innovation charity Nesta, who said: ‘It isn’t clear to me that there is something inherent about equity crowdfunding that is more likely to generate unrealistic valuations.’

At Stratosphere Peer to Peer Lending, we ensure all investment opportunities are secured so that the risk to investors is reduced as much as possible. To those businesses applying for crowdfunding investors, we encourage you to ensure that you value your business accurately, as well as ensure that you’re sufficiently covered against standard business risks.

To understand our business model (which is lending for property development projects with a first charge security), please visit this website and check out our FAQs section.