Peer-to-peer lending

Peer-to-peer lending (P2P) is a type of business loan where a large number of private investors lend to a business, usually through an online platform. The idea is that both the lenders and the borrowers get a better rate than they would through the banks.

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Peer-to-peer lending

Peer-to-peer lending (P2P) is a type of business loan where a large number of private investors lend to a business, usually through an online platform. The idea is that both the lenders and the borrowers get a better rate than they would through the banks.

Peer-to-peer lending is a bit different to standard business loans, for a few reasons. Using P2P means that you’re borrowing from a collection of individuals, and the peer-to-peer lending company facilitates the arrangement. You’ll still apply for the loan directly with the P2P provider; but technically you won’t actually borrow the money from them.

How does peer-to-peer lending work?

From the borrower’s perspective, approaching a peer-to-peer lending platform for a loan is much like applying with any other business lender. They’ll ask about your turnover, profits and trading history, they’ll want to see your bank statements and filed accounts, and they’ll ask about your plans for the money.

Once you’ve passed their initial criteria, your loan will be opened to the platform of investors, who then offer smaller amounts that collectively add up to the sum you want to borrow. Different P2P platforms handle this stage differently, with some using an auction-style format to ‘bid’ an interest rate, while others set the rates and simply wait for investors to choose particular loans that they want to invest in.

If all goes well, you’ll reach 100% of your target amount and get the funds shortly after.

Peer-to-peer lending vs crowdfunding

Peer-to-peer lending is often confused with crowdfunding — in fact, you could argue that peer-to-peer lending is a subcategory of crowdfunding — but the key difference is that P2P is about loans rather than equity purchase or donation.

Unsecured peer-to-peer loans

Most of the time, peer-to-peer lending platforms offer unsecured business loans. The upside with unsecured finance is that you don’t need any security and they can be fast to set up — but your business profile will be closely scrutinised and the interest rates can be a bit higher.

Having said that, some peer-to-peer lending platforms offer competitive interest rates — but the best rates are only available to the strongest businesses.

An alternative to the banks

One of the major reasons for peer-to-peer lending's popularity is that it offers an alternative to the banks, both for businesses looking to borrow and investors looking to earn a return.

Available to anyone through simple online platforms, P2P is one of the most accessible forms of alternative business funding.

Peer-to-peer lending: pros and cons

  • Usually unsecured: no security required

  • Fast: process takes a few days

  • More accessible than bank finance

  • Interest rates can be higher

  • Doesn't suit every business