Why secured lending can be a benefit when investing

If someone in the street asked to borrow some money, you would want some form of guarantee you were going to get it back before you agreed to hand over any cash.

Yet, when it comes to peer-to-peer investing, many investors forget the importance of such assurance as the UK’s P2P sector is made up of unsecured consumer and business lending as well as secured business lending.

Secured lending is one way of reducing risk, ensuring there’s something real behind each loan. This is also known as asset-backed lending, it means if a borrower defaults on their loan there is a sellable asset which can help get the lender their money back.

FOLK2FOLK is one such lending platform that makes loans against specific assets such as property/land, making each lending agreement a secured loan. The level of security based on the value of a property, rather than on business projections, determines the loan offered and rate of interest offered. It means investors don’t take on any undue risk, which can come with overvaluing an enterprise or valuing a property that doesn’t exist yet which can be the case in many property backed investments.

That’s especially important when each loan is fulfilled by just a handful of investors. It’s important to borrowers too, who know that their backers have provided their own funds to support their business plans.

This sense of accountability is crucial and potentially increased when you match borrowers and lenders locally rather than at random through a computerised algorithm.

With so much of our finances carried out on the internet these days, from online banking and shopping around for insurance to peer-to-peer loans, it’s easy to forget how the money we make, spend and invest can have an impact on local businesses. With secured lending, investors now can see the reality of where their money is going making it tangible, personal and a bit more emotional over investing in a fund or stock market.

When a lender backs a business in their local area they want it to succeed, not just because of the interest they stand to earn, but because they can see for themselves how it can help the local economy helping to create financially and socially sustainable communities.

Known as the local lending movement, investors can for example, watch the progress being made as a businesswoman transforms her farm lands into a glamping site, or as the nearby golf course adds a hotel and additional facilities to its site. For the borrower, knowing their lenders and having full transparency adds a deeper level of responsibility to get it right, repay and deliver on their initial business plan.

Secured lending allows local entrepreneurs, many of whom are struggling to find funding from traditional sources, to access much-needed capital to drive their business forward.

Crucially, secured P2P investing can provide lenders with added peace of mind, giving them the confidence to lend to a local business, in the knowledge they have an added layer of security that comes from investing in local bricks and mortar.