Peer-to-peer lending

Peer-to-peer lending offers an alternative form of business finance which allows individuals or businesses to lend directly to other people or businesses, bypassing traditional banks.

This lending model functions on a 'many to many' basis through online intermediaries, known as lending platforms. 

These platforms facilitate and manage the loan arrangements, ensuring a streamlined process for both lenders and borrowers.

In this article we’ll explain what peer-to-peer lending is, the various advantages and disadvantages of using it, and how you can apply.

As with all finance types, it’s a good idea to seek independent specialist financial advice to help you determine which finance type is right for you and your business.
 

What is peer-to-peer lending?

Peer-to-peer lending works by matching borrowers with lenders via online platforms or offline brokers.

You fill in an online form and answer questions about how your business will use the loan, the amount you want to borrow, and how long you need the money for.

You also need to provide certain company information.

On some peer-to-peer platforms, a decision can be made almost instantly, meaning you might receive the loan in as little as a couple of days.

If you receive a loan, you might first need to pay an arrangement fee to the peer-to-peer platform.

Then you pay back the loan, with interest, by making regular repayments for the duration of the loan agreement.

The principal idea behind peer-to-peer lending is that both lenders and borrowers may be able to secure a better rate than if they had gone through a bank.

Peer-to-peer lending differs from traditional business loans in several key ways. 

With peer-to-peer lending, you borrow funds from a group of individual investors rather than a single financial institution. 

The peer-to-peer lending platform acts as an intermediary, facilitating the loan process. 

While you will apply for the loan directly through the platform, the actual funds are provided by the individual investors, not by the platform itself.

In the UK, peer-to-peer platforms are regulated by the Financial Conduct Authority. 

You can check that a platform is regulated by searching for it on the FCA's register online.

Who's involved in peer-to-peer lending?

There are several peer-to-peer lending platforms in the UK and they all operate in a similar way.

You complete an online form, answer questions about your business including on your turnover, profits, and trading history, and the amount of loan that you need.

You may also need to submit copies of bank statements and filed accounts and you could also be asked about how you’ll spend the loan amount.

Then the platform matches you with suitable lenders.

When you submit a formal application, the platform will conduct credit checks.

After meeting the initial criteria set by the peer-to-peer lending platform, your loan request will be presented to a pool of investors. 

These investors contribute smaller amounts that together reach the total sum you aim to borrow. 

The process varies across different platforms: some utilise an auction-style system where investors bid on interest rates, while others have fixed rates and wait for investors to select specific loans they wish to fund.

If sufficient interest is generated and your target amount is fully funded, you will receive the loan funds shortly thereafter.

Loans can vary in size between platforms.

Depending on the amount you need to borrow, and your business’ profile, the lending might be:

• unsecured, and driven by the cashflow your business generates
• secured, with you putting up assets as security

Each peer-to-peer lender has its own appetite to risk, so if one lender rejects you, it doesn't mean another lender will too.

What are the benefits of using a peer-to-peer lender?

Like all finance types, peer-to-peer lending has a number of advantages:

Easily accessible

One of the main reasons for the rising popularity of peer-to-peer lending is that it provides an alternative to traditional bank loans, benefiting both businesses seeking loans and investors looking to earn returns.

Accessible to anyone via user-friendly online platforms, peer-to-peer lending stands out as one of the most approachable forms of alternative business financing.

Wide range of platforms

You should be able to find a lender that closely suits your needs.

Small to large loans catered for

The flexibility of this type of funding means you shouldn't have to borrow more or less than you need.

Simple to borrow

The lending process is straightforward and decisions are made quickly, meaning you receive the money with little delay.

Retain full control of your business

There's no obligation to surrender ownership of part or all of your business, as there is with other types of finance.

Quick decision

Peer-to-peer loans are typically processed much more quickly than traditional bank loans, which undergo extensive due diligence and checks on trading and credit information.

Lending-based crowdfunding platforms feature user-friendly interfaces that offer a less intimidating experience compared to in-person meetings with bank managers.

However, lenders must be comfortable with the associated risks and potential returns. 

Consequently, it may still take several days or even weeks to finalise the loan.

Lower credit ratings are not a barrier

Businesses with lower credit scores have increasingly turned to peer-to-peer finance. 

This shift may be due to traditional financial institutions not meeting their funding needs or because they have previously been denied a loan by these institutions.

What are the risks involved with peer-to-peer lending?

Before you decide that peer-to-peer lending is right for you it’s a good idea to look at the potential drawbacks.

Interest rates

These can be higher for peer-to-peer loans than for standard business loans.

Credit score

Because lenders conduct credit checks, this can have an impact on your credit score.

Being late with a repayment, or missing one altogether, can also harm your credit rating.

Although having a lower credit score isn’t necessarily a barrier to obtaining finance; to get the best interest rate for your peer-to-peer loan, a business will likely need a good credit score.

Learn more about how your business credit score can impact your finance options.

Charges and fees

You might have to pay to arrange the loan. 

It's also likely you'll be charged if you miss payments or repay your loan early.

Personal guarantees

You will likely be required to provide a personal guarantee for the funds you wish to borrow. 

This means that if you fail to meet your repayment obligations, your assets—including personal assets—could be at risk.

Learn more about personal guarantees.

Defaulting

If you fail to make the repayments on a peer-to-peer loan, the provider may pass the debt on to a debt collection agency, or it may take you to court.

This could affect your credit report.

Is peer-to-peer lending right for my business?

Peer-to-peer lending is a flexible and straightforward way to borrow funds for a business. 

However, it may not be for every business, for example those that lack a trading history such as a start-up, though some platforms may lend to a start-up owner based on their personal credit record.

What do I need to consider before approaching a peer-to-peer lender?

Here are some important questions you'll need to consider before proceeding with peer-to-peer lending:

• How much money do I want to borrow?
• How will I use the loan?
• What’s the interest rate?
• Are there fees involved?
• For how long is the loan?
• Will I be charged for paying back the loan early?
• Will I have to pay a fee for missing payments?
• Can I afford the loan repayments, interest and all the fees?

How do I apply for peer-to-peer lending?

You can search for peer-to-peer lenders online.

Once you've found one you think is suitable for your business, you can set up an account with them.

What are the alternatives to peer-to-peer lending?

Peer-to-peer lending may work very well for some businesses but there are alternatives if you decide that it isn’t for your business.

Some of these include:

• Business loans
• Asset finance
• Direct lending funds
• Grants finance
• Equity crowdfunding
• Community development finance institutions
• Leasing and hire purchase
• Revolving credit facilities.