Peer-to-Peer Business Lending: An Alternative Route to Finance
Peer-to-peer lending is a way for businesses to fund growth by borrowing from private investors, instead of taking more traditional lending routes. We look at the pros and cons of this alternative route to finance.
If you’re looking to borrow to grow your business, boost your cashflow or cover revenue gaps, you might have considered alternative sources of finance, like peer-to-peer (P2P) lending.
If you’re wondering how this relatively new type of lending differs from traditional finance routes, and how it works for borrowers, here’s what you need to know.
What is business P2P lending?
P2P lending, also called marketplace lending, offers businesses loans from private investors through a specialist online platform, without the need for traditional banks as intermediaries.
Private individuals who want to invest in businesses hold funds with the P2P platform, which matches them with businesses looking for a loan, until the total loan amount requested is met.
Since being established around 2005, these platforms have lent billions to UK businesses.
What are P2P lending platforms?
They’re websites which match private lenders with borrowers looking for a loan, and transfer money between them.
The online platform doesn’t lend the money; it arranges the loan on behalf of the parties involved, sets the rates and terms, and processes the transactions.
How does business P2P lending work?
If you’ve decided P2P lending is right for your business, this is how it usually works:
- Once you’ve compared P2P platforms and chosen the one that's right for your business, you apply online, stating how much you want to borrow, and for how long. Like any business loan application, you’ll need to supply supporting information, like financial records, a business plan and bank statements.
- The platform then decides the risk of lending based on your credit score, and the information you’ve submitted about your business. The better your credit rating, the lower the interest is likely to be on your loan. Some platforms also set interest rates through an auction, where lenders bid for the lowest rate.
- If your loan is approved, the listing is matched with prospective lenders, who decide how much they want to lend, until the amount you’re looking for is met.
- You pay back the loan, with interest, through regular repayments, usually monthly, for however long your loan agreement is due to last – usually between one and five years. You may need to pay an arrangement fee to the P2P platform at the outset.
How do I choose a business P2P lender?
When you’re researching and comparing P2P platforms, you’ll want to consider things like:
- any fees charged
- the minimum and maximum you can borrow
- if your business needs a minimum turnover to qualify
- any penalties if you settle the loan early
- the process if you miss payments
- the interest on loan repayments
Take time to check you’re comfortable with how the platform operates, and look at the types of business it covers. You can also consider feedback from customers about their experiences using the platform.
» COMPARE: Peer-to-peer business loans
How can I apply for a business P2P loan?
You can apply through the provider’s website, or through a broker. Like any business loan application, lenders need to have confidence that you’ll be able to repay them.
You need to be the owner or a registered company director to apply. Other eligibility criteria, like your minimum age and income, depends on the platform, but you’ll usually need to:
- explain how much money you want to borrow, and for how long
- outline how the business will use the loan
- evidence how the business will repay the loan
- show your annual turnover
- provide up-to-date management accounts
The platform will check your credit risk before they decide if they can accept you, and the interest rate you’ll be charged.
What are the advantages of P2P lending?
There are plenty of reasons why borrowers might benefit from taking the P2P lending route:
- Streamlined process: It can be a speedy, straightforward way to get the funds your business is after. Decisions on applications can be made in minutes, with the full loan amount sometimes deposited within days.
- Unsecured loans: Most loans through P2P lending are unsecured, being driven by the cashflow your business generates. This means you don’t have to give up any equity in your business, or offer assets as security.
- Flexibility: You can set a specific loan amount, so you only borrow what you need. Available loan amounts and terms are wide-ranging, and some P2P platforms have no minimum loan amount.
- Accessibility: It might be a good option if more traditional sources of business funding, like high street banks, have proved hard to come by. It can give you access to thousands of private lenders, covering all sectors.
What are the disadvantages of P2P lending?
This kind of borrowing isn’t for every business, and like any loan, comes with downsides worth being aware of:
- Charges and fees: The platform may charge a fee to arrange the loan, or if you miss payments or settle your loan early.
- Interest rates: Interest rates of P2P loans might be higher than high street banks or building societies.
- Action taken for missed payments: If you don’t make your loan repayments, the provider may pass the debt on to a debt collection agency, or it may go to court. This may affect your credit rating and result in penalty fees.
- The impact of credit checks and reports: The credit checks the platform runs using a credit reference agency will affect your credit report, though some use an initial ‘soft’ credit check that doesn’t.
How is P2P lending regulated?
In the UK, the Financial Conduct Authority (FCA) regulates P2P platforms. You can search the FCA register to make sure a platform is authorised. In 2019, the FCA introduced rules and guidance to improve standards in P2P lending, which asked that platforms provide clear and accurate information about the investment risk, and have arrangements in place in the event of the platform failing.
You might not have the same protections using a P2P platform as if you borrowed in other ways, though. It can depend on how the loans are drawn up and whether the lenders are institutional investors or private individuals, for example. Ask the platform how this works and how it differs from a normal loan, and always check the terms and conditions.
If you need to make a complaint against a P2P lending platform, you can ask the Financial Ombudsman Service (FOS) to get involved. However, you must first raise your complaint with the P2P lending platform, and give them up to 8 weeks to sort out your complaint.
What other types of business finance are there?
If you’re not sure if P2P lending sounds right for your business, there are other business funding options that might be worth exploring.
Whether you need to fund expansion, pay off debts, invest in new equipment or regulate cashflow, it’s a case of weighing up your options and the affordability of the loan. And when you apply, demonstrating clearly how you’ll spend the cash and how you’ll pay it back, so lenders feel confident they’ll get a return on their investment.
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Holly champions clear, jargon-free writing. She’s been creating finance content for leading organisations for over 10 years, with expertise in insurance, wills and probate, and all things health. Read more