Already well established in the US and UK over the last decade, peer-to-peer lending companies offer their services online.
They attempt to operate with lower overheads and provide more competitive services than traditional financial institutions.
The online platform allows SMEs secure loan finance at competitive rates, with investors earning reasonable returns on their funds.
“The perception of peer-to-peer has evolved rapidly in the past year and it is now a mainstream alternative to banks for loan requirements in the SME market,” said Peter O’Mahony, CEO of Linked Finance.
“SMEs are now clearly in growth mode and the economy needs these businesses to thrive. A key part of Ireland’s economic recovery is access to reliable credit on good terms and available quickly. While banks are the traditional source of funds, businesses need a quicker turnaround and easier process than what the banks usually offer. Linked Finance bridges that gap and brings the added advantage of creating a community of active investors in Ireland’s recovery,” he said.
Launched in 2013, Linked Finance is Ireland’s largest peer-to-peer lending company with a base of 12,000 investors looking to lend to businesses at a competitive interest rate return.
With the financial crisis having resulted in interest rates hitting record lows and access to funding from banks severely limited, an alternative matchmaking of savers and borrowers emerged.
To date, Linked Finance has facilitated loans for over 350 Irish SMEs totalling over €18m.
It currently has over €11m in funds available through its online platform. Loans range from a minimum of €5,000 to a maximum of €100,000. The average amount is around €28,000, typically over a three-year term.
Walsh’s Bakery in Clifden is currently in the process of raising €50,000 through peer-to-peer financing facilitated by Linked Finance.
Established in 1953 and employing 34, it supplies a wide range of local retailers, including SuperValu.
Founded by Tom Walsh, and now run by his son Cathal, the bakery produces a wide range of products, including traditional breads, birthday cakes and pastries.
“The business has grown so much over the years, in the height of the season we now employ 34 people in a variety of jobs, from bakers and cafe staff, to delivery drivers,” Cathal said.
The investment will be used to upgrade and expand the company’s facilities.
“We still run on the same business principles that my father instilled in all of his children; respect your staff, care for your customers and always work hard. This is why I think we have been a success,” he said.
However, some voices have urged caution around the peer-to-peer concept.
Adair Turner, the former chairman of the UK’s Financial Services Authority, warned recently that “the losses which will emerge from peer-to-peer lending over the next five to 10 years will make the worst bankers look like lending geniuses.”
“You cannot lend money to small and medium-sized enterprises without someone doing good credit underwriting,” he said.
Advertising for the lenders should have clear warnings and only people who can afford to lose their money should take part, he said.
“This idea that you can automate that on to a platform, it has a role to play, but it will end up producing big losses,” said Mr Turner.
Christine Farnish, chair of the Peer-to-Peer Finance Association, responded that Mr Turner’s comments “fly in the face” of the evidence.
“All members of the peer-to-peer association operate with high standards of transparency and business conduct — this includes publishing their full loan books on their websites and providing clear information on all fees and charges to both investors and borrowers. I would challenge anyone to find this level of transparency in any other part of the financial services market,” she said.