Everything You Need To Know About Peer-to-Peer (P2P) Lending Businesses
Updated: Nov 29
We've seen a complete overhaul to every aspect of our lives in wake of Covid-19. For the first time in modern history, a record chunk of the workforce has retreated into the murky depths of the Internet. The good news is that the alternatives for making money have never been higher in this day and age. If you find yourself hard up and unsure of what to do next, take heart. Now is an excellent time to switch gears and kickstart your online side hustle. This side hustle can be a great extra source of income and give you that boost of financial security you’re looking for.
Now is the time to discover the world of P2P. PwC projects a growth of up to $150 billion in the P2P lending industry by 2025. There's so much potential for you to tap into. But how can you make use of this rapidly growing market? We're going to take you through everything you need to know about how to build a P2P platform of your own and get a share of the market. The model is so simple that peer-to-peer lending apps have popped up in the past decade. That’s right - you can take out a loan right from the palm of your hand.
WHAT IS A P2P LENDING APP - AKA A LOAN APP?
Let’s take a closer look at the mechanics and break down the terminology.
P2P lending is usually referred to as a “peer-to-peer lending” or “person-to-person lending”. This term means issuing and receiving loans by individuals directly - there's no need to go through the conventional financial institutions, such as an intermediary. P2P gives the opportunity for both borrowers and lenders to become users, carried out by specialised P2P lending sites. You could view it as a loan app, as some specialists do.
The P2P software is developed by companies/intermediaries, and they'll receive their income from both the borrower and creditor. This could come in the form of fixed payments, or they'll take a small percentage out of the sum of the borrower/creditor's loan. This means a network of lenders is there for you to harness - the P2P lending app that's right for you is literally a few taps away.
WHAT ARE THE ADVANTAGES AND DISADVANTAGES TO P2P LENDING APPS?
Like every technology, the P2P trend has its strengths and weaknesses. We're going to take you through those pros and cons.
Let's begin with advantages to give you the scope on P2P.
Lack of an expensive intermediary
P2P lending platforms have a few significant differences from your conventional bank. You've got to know there is neither a bank, nor expensive intermediaries. That means customers don't need to pay for banking services, visit branches, or convince the creditor to issue a loan for you - you're already solvent and trustworthy (go you). The system is completely carried in an online environment. Not only that, all operations are performed via Internet platforms, existing at minimal fees for applications or monthly fees. What does this mean for you? No large sums, no deposits and guarantors. The British company Zopa did it first in 2005, offering the capability of P2P lending investment. That's an advantage you've got on your hands...or on your phone.
Remember, creditor and borrower determine the conditions
Both the investor (creditor) and borrower can choose the conditions for the future bargain - that's the deadline, sum and interest rate. So, the provider monitors how participants follow the accepted rules. For example, one person can apply for only one loan issuance; they can't request a new loan if the previous one isn't paid off. How to participate? A user just needs to register and fulfil a special form. Keep in mind, it's better for the borrower to fill in as many points as possible - it will increase their chances of getting that loan, and a special rating will show the user’s solvency. That's how P2P works on the technology front.
A potential borrower should upload scanned copies of their passport and tax identification number.
They can submit materials proving their solvency - things like copies of documents, pictures, videos etc. Be reassured, the best P2P lending apps always provide users with a high level of trust.
The provider will offer to raise your rating, and test your personal data in the bureau of credit ratings. Even better, it doesn’t cost too much, but it will have a big influence on potential creditors. It's one of the best benefits of a P2P lending app.
Small interest rate
High overheads of banks and microfinance companies will mean higher interest rates for you. After all, they need to pay a premise's rent, employees’ salaries, finance the development of new products etc. But there's none of that on P2P lending platforms. No premises, no thousands of employees, no office equipment. Nice!
On the whole, we can see some great advantages. But to get the best overview, we've got to talk disadvantages.
If the borrower doesn’t pay off their credit on time, debt creditors will get involved. It's not pleasant. Still, it's the procedure you'd expect when you cooperate with a conventional bank.
Loan amounts are not so high
Since P2P lending platforms are rather new, not all creditors are going to want to fork out millions of dollars to invisible lenders. So at the moment, loan amounts in P2P programs are usually limited to $50,000 - not that that's a low amount.
STARTING A P2P LENDING PLATFORM – MARKET FEASIBILITY AND RESEARCH
Demographics and Psychographics:
Who's going to use P2P? You're likely to see: students, entrepreneurs, small businesses, start-ups and other high risk individuals using the services. Others include older folks, as well as people avoiding the traditional banking institution. Basically, people who need a quicker, more efficient way of getting the loan they need.
LIST OF NICHE IDEAS WITHIN THE P2P LENDING INDUSTRY
The P2P lending business industry is all about making sure those who've passed their screening get the amount they need - quickly from the lenders who can provide, (and like we said) bypassing the banks. So there aren't niches per-say, but there are services some businesses specialize in:
Commercial lending loan
Bad debt loan
More specialities in certain fields equals more finances for the lending business - and more available creditors willing to part with their cash. It's doable for a big P2P lending business, but a small-scale business will focus on just one or two areas of specialization.
THE LEVEL OF COMPETITION IN THE P2P LENDING INDUSTRY
Starting a P2P lending business isn't especially tricky since most of it's online, so the equipment any serious minded entrepreneur needs is well within reach. But keep in mind, strict regulations keep the industry sane, and certain laws you'll need to know about can make this a complicated business. Be very careful and have backups in place - as we know, things can always go awry.
With these different areas of specialisation, you'll need to decide on which services you want to focus on. It's likely you'll see larger P2P lending businesses and other well established businesses with more services to offer. With smaller companies (who don't have the luxury), you'll see them offering one or two specialised areas.
A DETAILED COST ANALYSIS FOR STARTING A P2P LENDING PLATFORM
Okay, so the technology and equipment are in reach. The capital requirement however depends on the objectives and goals of your P2P lending business. While someone in the same scale as you might start off with lower capital, yours might be larger if you intend to specialize in more areas. It's important to make sure you've met these requirements before you launch your P2P business:
Leasing a facility for at least a year
Equipping the office with computers, phones, printers and furniture
Launching a website / Loan app
Additional expenditure such as business cards, and signage
HOW TO BUILD A P2P LENDING PLATFORM
STEP 1: Decide on a business registration form
When choosing a form of registration of a legal entity, taken into account:
Registration as a corporation or a limited liability company will protect against creditors in case of bankruptcy or force majeure.
Corporations impose significantly more requirements than LLCs, including requirements for accounting and tax reporting. Moreover, corporations must hold shareholder meetings at regular intervals.
Different forms of registration imply different tax statuses, but an LLC can choose to pay taxes as an LLC, or as a corporation.
The corporation is obliged to distribute profits and losses according to the share of ownership of each participant. In LLC, distribution occurs according to the operating agreement; the terms are decided by the participants of the company.
STEP 2: Register the company name
Usually, a company (trademark) must be registered in the state in which the business will operate. For P2P platforms, this is the main office location. Next up, you'll need to take into account:
The name should be free, which you can check on the website of the United States Patent and Trademark Office.
The brand name does not have to match the domain name.
Registration rules may vary widely by state.
People have to understand the scope of activities by the name of your company, and the registration form is mandatory. E.g: P2P Lending, Inc., (if it's a corporation), or P2P Lending, LLC, (if it's a limited liability company).
STEP 3: Register the platform domain
The domain is your website address. It shouldn't be very long, and easy to read. Abbreviations are okay if it's the abbreviated name of the brand. Important points at this stage:
Domain and company name must be unique. Check whether a domain is free or not, sites that'll let you know are a Google search away.
Domain registration requires money. As a rule, these are small amounts - up to $20, with exceptions; depending on the domain zone it can be $100 or more.
When registering a domain, you don't buy it permanently, but rent it for a period of time - typically one to three years.
STEP 4: Create a team
You're nothing without a good team, so choosing teammates must be approached with the utmost seriousness. Here's some recommendations:
Your team will need to be staffed with people who know how to operate a website; and experts in finance, financial law, marketing, or advertising.
You'll need people with experience in the banking sector. People who understand how to build a credit business, and assess credit risks.
Hire people with a long-term focus - immediately offering long-term contracts and social packages with accumulating bonuses.
Look out for employees from other successful companies. People with the experience, the necessary skills and understanding of the task.
STEP 5: Raise money for start-up capital...
As well as your site's content and other operating expenses at the start, you'll need funds to issue first loans. Don't expect P2P investors to immediately come to your site. There's other ways to collect money:
Primary Coin Offer (ICO / STO). You can create tokens that will bring dividend profits or reduce commissions.
Attracting venture capital. You'll need to make a detailed business plan and reach out to business angels; people who invest a lot of money in exchange for a share in the business.
A bank load will need a solid pledge.
Team size, marketing strategy and the cost of developing the platform determines the amount of start-up capital. Creating a P2P lending platform fluctuates around $10-200 thousand and it will take the same amount on marketing promotion - a little less if you use bounty campaigns.
STEP 6: Develop a P2P Platform
You can hire a blockchain programming team or outsource the development to make your platform from scratch. Although, it's better to use customisable, ready-to-use solutions like a White Label platform. Important things to remember when using a White Label platform:
These are sample solutions that are not suitable for unique credit products. White Label platforms can integrate your own credit scenarios, but this will require hiring the appropriate specialists.
It's better to use an open source White Label, their products contain fewer errors and are more trusted by users.
It'll take between 4 to 12 months to develop the P2P from scratch. With a White Label product, this time can be cut in three, and cost will decrease.
STEP 7: Create a web portal
When creating a site for peer lending, insure the following is included:
Maximum number of payment gateways integrated into the portal.
Intuitive site interface that supports several major languages.
Some White Labels include basic website design, but use them only as a draft; your site design must be unique and recognizable
STEP 8: Testing the site and platform
Ensure each platform usage scenario is tested, and that everything works as it should. Crucially, pay attention to:
Security - the connection with the user and payment gateways must be encrypted, personal data is hidden behind seven seals, and financial gateways are closed for 1000 and 1 lock.
Usability - the user at the first transition to the site must understand how to register, apply for a loan or invest money.
Performance - you can find out the speed of loading a site on different devices using the PageSpeed Insights service, which includes tools to improve portal performance.
STEP 9: Platform Launch
Before launching your site, conduct a marketing campaign, offering first users (borrowers and investors) discounts, lower (or higher for investors) interest rates, more loyal conditions for granting a loan and the like. But look out for:
Scammers who want to get a loan, then disappear. There are a lot of such people at the start, as there is a chance to find loopholes in the risk assessment or user identification algorithm.
Hackers who can launch phishing resources, will try to hack a website, or launch a DDoS attack (ordered by competitors).
STEP 10: Starting the Technical Support Service
Despite all the precautions, testing and debugging, the platform after launch is almost guaranteed to have errors and bugs, and it's likely these won't be spotted by full-time specialists, but by users. Make sure to quickly start a support service working with the maximum load in the first few months.
From this you will:
Catch and destroy most of the errors and bugs.
Identify what was missed when development started, and promptly add missing features, elements or instructions.
Finally, get feedback from users, and learn what needs to be improved so this platform is more convenient and understandable.
HOW TO PROMOTE YOUR P2P LENDING APP?
Congrats! Your app is developed and waiting for somebody to use it. But how can you promote it? Put some strategies in place to deal with the challenges.
Keep in mind app originality - although the technology's not old, the number of P2P mobile apps and websites is growing every year, so make sure your new app stands out against other top P2P lending apps on the market. Here's some tips:
For instance, identify only one type of lending for a specific purpose. That is, your app could give loans to students, or medical loans for treatment.
Understand what apps prevail with your market analysis. You won't become one of many, but you'll stand out in the crowd with something new to offer.
Try focusing on business loans to entities, as well personal loans from one person to another. The process might be hard to implement, but good for you and it'll give you that competitive advantage in the business world.
Involve the press - mass media is one of the best ways to attract people to a new product. Everybody knows it. So use the press to tell the whole world about your fantastic new P2P lending app.
If you can't cooperate with the press, it will help you draw the attention of potential investors to use your platform for lending money. Nobody wants to lose their money, so if the press starts spreading news about your app, it will give investors and borrowers more trust in your service. Alternatively, you may find an opportunity to cooperate with already popular platforms that will show your company in a good light.
Good old advertising - this alternative can be referred to the mandatory way to promote your app. Nobody will install and use your app if there isn't any word about it, right? So get your ad on as many websites and other web services as possible. Of course, it would be better to target financial services to find the required audience.
Never forget about social media - we all know people spend a lot of time on it, so use it. It's a great tool to find new customers. Be brave and may the odds be ever in your favor!
Think about all the options you've got to start your successful online investment business. There's loads of solutions and the web offers extensive features and functionality depending on your particular niche and requirements.
Let's review our key takeaways:
P2P lending can cater to many industries or needs: car financing, personal loans, debt consolidation, real estate.
Your platform has to stand out. A loan calculator, auto-investing, secondary market, IFISA support (for the UK) are user-friendly features that'll help you do just that.
Build your platform from scratch, or start with a White-Label P2P lending software first. White Label solutions can be a great option to test the market; LenderKit is one of the solutions that can help you get your P2P lending business off the ground.
We have experience with several jurisdictions around the world and are familiar with the main regulations in the UK, EU, US and Saudi Arabia. If you need advice on how to start a custom P2P lending platform development – reach out to our team for a free consultation and demo.
You won't become one of many, because you'll to stand out in the crowd with something new to offer.