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Peer to Peer Funding in Property

Go back a decade and raising finance for a property investment generally meant mortgaging. The financial crisis, however, changed the 'mortgages on demand' situation at the time and forced many investors to look for alternatives. One of the alternatives that has begun to establish itself of late is peer to peer funding. So in this report we will look more closely at this type of funding - not only for those wishing to borrow for a project but also for those who might want to invest their capital.

From being almost unknown a decade ago peer to peer funding has grown fast. According to the November 2014 'Understanding Alternative Finance' report from Nesta, the wider alternative finance market was worth just £267m in 2012 (a 150% rise over the previous year) but had grown to £1.7bn in 2014. Some forecasts suggest £4.4bn of lending will be done this way in 2015.

So exactly what is peer to peer funding and how does it differ from other forms of finance? Essentially peer to peer (or P2P) funding is the practice of unrelated parties, who might be private individuals, companies, institutions or funds, lending and borrowing money directly, without the involvement of a bank. It is very distinct from another form of alternative financing (or altfi), known as crowdfunding. Crowdfunding normally involves an equity stake in a business and a share of any profits if any. With peer to peer the lender receives agreed interest on their loan. This may, additionally, be secured against property. Peer to peer normally offers a lower fixed return but it is further down the scale of risk.

In the current financial climate peer to peer appears to offer a solution to restricted bank liquidity, especially for commercial property transactions and sub-£5m lending which are often more difficult to borrow for. It also offers scope for lower borrowing costs as there is no bank (profit) margin to cover.

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