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Peer to peer business lending

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Jan 4, 2023

Fact Checked By:
David Nicholson - Finance Editor

Peer-to-Peer business lending – How does it work?

Peer-to-peer business lending allows businesses to borrow from private investors instead of traditional lenders. This alternative route to financing is examined.

You might consider peer-to-peer lending (P2P) if you are looking for financing to grow your business, increase your cash flow, or cover revenue gaps.

This article will explain how peer lending works and what it means for borrowers.

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What is P2P lending for business?

Marketplace lending is also known as P2P lending.

It allows businesses to borrow money from private investors via an online platform rather than business loans. There are no intermediaries or traditional banks involved.

Private investors who wish to invest in companies can hold funds on the P2P platform.

This matches them with businesses looking for loans until they have received the requested amount.

These platforms were established in 2005 and have lent billions of pounds to UK companies.

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What is a P2P lending platform?

These websites match private lenders and borrowers seeking loans and transferring money between them.

The online platform does not lend money. It arranges the loan for the parties, sets rates and terms and processes transactions.

What is the business model for P2P lending?

This is how P2P lending usually works if you have decided that it is right for you.

  • After you have compared the P2P platforms and decided which one is best for you, you can apply online. You will need to specify how much and how long you wish to borrow. You’ll need to provide supporting information like bank statements and financial records for any business loan.
  • The platform determines the risk of lending based on your credit score and information about your business. Your credit score will determine how much interest you can get on your loan. Some platforms allow lenders to bid for the lowest interest rate by holding an auction.
  • Once your loan has been approved, it is on the market for potential lenders. They decide how much money they are willing to lend until you get the amount you want.
  • The loan is paid back with interest through regular payments, typically monthly. This can be for as long as your loan agreement lasts – usually between one to five years. The arrangement fee may be required for the P2P platform from the beginning.

How can I find a P2P lender for my business?

You should consider the following things when comparing Peer to peer platforms:

  • Any fees
  • The maximum and minimum amount you can borrow
  • If your business needs a minimum turnover to qualify
  • Any penalties for early repayment
  • If you have missed payments, the process will be re-evaluated.
  • The interest charged on loan repayments

You should take the time to review the platform’s features and the business types it covers. Customers can provide feedback about their experiences with the platform.

How do I apply for a peer-to-peer loan for my business?

You can either apply directly through the provider’s site or a broker. Business finance lenders need to be confident that they can repay the loan, just like any other business loan application.

To apply, you must be either the registered owner or a company director. You will usually need to meet the following eligibility criteria:

  • Please explain how much you would like to borrow and for how long
  • Describe how the company will use the loan
  • Evidence of how the company will repay the loan
  • Show your annual turnover
  • Provide up-to-date management accounts

Before they accept you for credit, the platform will assess your credit risk and determine the interest rate they’ll charge. If you have bad credit you should look into a bad credit small business loan before committing to any P2P lending.

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What are the benefits of P2P lending?

Borrowers might be able to benefit from the P2P lending route for many reasons.

  • A simplified process – This can make it easy to obtain your company’s funds. The decision on your application can be made within minutes. Sometimes, the entire loan amount is deposited in a matter of days.
  • Unsecured business loans – Most loans via P2P lending are unsecured. This is because the cash flow generated by your business drives them. You don’t need to give up equity or offer assets as security like you would for a secured business loan product.
  • Flexibility – You can specify a loan amount to ensure you only borrow the funds you require. There are many loan terms and amounts available. Some P2P platforms don’t require a minimum amount.
  • Accessibility – This is an excellent option for those who have difficulty finding traditional funding sources, such as high street banks. You can have access to private lenders in all areas.

What are the drawbacks of P2P lending?

This type of borrowing is not for everyone. And, like all loans, there are downsides that you should be aware of.

  • Fees and charges: If you default on payments or close your loan early, the platform might charge a fee.
  • Interest rate: The interest rate for P2P loans may be higher than those offered by high-street banks or building societies.
  • Recommendations for late payments: The provider can pass your debt to a debt collection agent or to the court. This could affect your business credit rating and lead to penalties. Fix your credit rating if it needs improving to get better finance.
  • Credit checks and reports. The credit checks that the platform uses, via a credit reference agency, will impact your credit report. However, some agencies use a soft credit check that does not affect credit. If you have had a business go insolvent, it will be hard to get P2P lending.

What regulations are there for P2P lending?

The UK’s Financial Conduct Authority regulates P2P networks. To verify if a platform has been authorized, search the FCA Register. The FCA issued guidance and rules in 2019 to improve standards in P2P lending.

They asked that platforms give clear and accurate information on the investment risk and make arrangements in case of platform failure.

However, you might not be able to get the same protections if you borrow through a P2P platform as if you were borrowing elsewhere.

This can vary depending on the way the loans are structured and whether the lenders are institutional investors or private individuals.

Ask the platform about how this differs from normal loans and read the terms and conditions.

To file a complaint about a P2P lending site, you can contact the Financial Ombudsman Service to ask for assistance. You must first make a complaint to the P2P lending platform. It will take up to eight weeks to resolve your issue.

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What are other forms of business finance?

You might want to explore other funding options if you aren’t sure whether P2P lending is right for your company.

It doesn’t matter if you need the money to finance expansion, pay off your debts, buy new equipment, or manage cash flow.

You just have to weigh up the pros and cons of each option. Lenders will be more confident if you clearly explain how you plan to spend the money and how you plan to pay it back.

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