Limits of risk

Crowdfunding and peer-to-peer lending offer a vital way for business to access funds

Sir, All finance involves risks, and crowdfunding or peer-to-peer lending is no different. But Harry Wilson’s article “Crowdfunding is ‘scandal waiting to happen’ ”, risks being too alarmist.

As peer-to-peer lending and crowdfunding move from the margins to the mainstream of business finance, it’s likely there will be failures. A high-profile crowdfunded project won’t pan out, a peer-to-peer lending platform will deliver disappointing returns to savers, or a smaller platform will go under, taking people’s money with it. So it’s important that lenders and borrowers know the terms of their investments — just as it would be with any other sort of finance.
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But we must not overstate the risk. Peer-to-peer platforms allow investors to diversify their risks across borrowers, limiting their exposure if something goes wrong. Reputable platforms make their terms of service clear to customers.

As it stands, crowdfunding and peer-to-peer lending offer a vital way for business to access funds and for savers to beat banks’ dismal savings rates. What’s more, the funding they offer is less likely to tie businesses up in red tape. My research for Nesta, a charity backing innovation in the UK, shows that over half of borrowers using peer-to-peer lending were eligible for a bank loan but chose to sidestep high-street lenders in search of a more flexible product.

As for scandal, those who have been paying attention will have noticed that the traditional banking sector has not been without its own share of that in recent times.