P2P lending and outside entrepreneurial finance

Later stage, unlisted SMEs are typically too old to attract equity crowdfunding, one of the two novel sources of outside entrepreneurial finance. The other source is peer-to-peer (P2P) business lending - sometimes called marketplace lending or debt crowdfunding - where unlisted SMEs raise medium term loans from a combination of the crowd of small investors and financial institutions via internet portals. The institutions benefit from the collective wisdom of the crowd while institutional investments reduce information asymmetries for other investors and may lead to herding by the crowd. This paper studies the incremental decision to choose P2P over bank debt by means of probit and logit regressions. It establishes that firms with relatively high credit ratings, smaller assets, lower levels of prior capital expenditures, and low leverage ratios are more likely to raise P2P rather than bank debt. The conclusion is that P2P debt plays a unique role in accommodating the outside entrepreneurial capital needs of these SMEs wanting medium term funding. The empirical work employs a sample 1,249 small, private SMEs that received P2P loans with maturities of up to five years 2013-2015 from Funding Circle, the leading UK P2P business lender.