Peer To Peer Lending

Written by Richard Wilcock | Reviewed by Simon Moorcroft | Updated: December 16, 2024

Table of contents

• What is peer-to-peer lending?
• How does peer to peer lending work?
• Peer to peer lending for business startups
• Peer to peer lending for small businesses
• Advantages and disadvantages of peer-to-peer lending for businesses
• Peer-to-peer lending for a business purchase
• Regulation for business peer-to-peer lending
• Do I qualify for peer-to-peer lending?
• Alternatives to peer-to-peer lending

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What is peer-to-peer lending?

Peer-to-peer lending (P2P) is a way for business owners to get working capital without the help of a financial institution. Instead, borrowers deal directly with what’s called ‘investor lenders’. These individuals lend their own money, making this type of finance quicker than others.

How does peer to peer lending work?

If you’re eligible for a peer-to-peer loan, the platform will present your application to several UK investors. One or multiple investors can choose to fund your application, but rather than dealing directly with each one, the peer-to-peer lending company facilitate the entire arrangement. Raising the necessary funds through multiple investors is what makes it easier to qualify for than other types of finance.

Once enough finance has been raised by interested investors, they will transfer funds to your business bank account, usually within one day.

Peer to peer lending for business startups

Getting a loan as a startup can be challenging; with little to no credit history, traditional high street lenders can have stringent criteria that you won’t necessarily meet. However, investors within a peer-to-peer lending platform create their own criteria, which makes it easier for startup businesses to find flexible funding sources. If you need working capital quickly, applying for a loan through a P2P platform can mean quick access to funds.

Investors base their lending decisions based on what you need the loan for, how much you need and the loan term, but they’ll also look into the risk your business carries with it. So, they will review applications on a case-by-case basis.

Peer to peer lending for small businesses

As a small business, you can face significant cash flow problems. With rent, utility bills and wages to pay, inventory to restock and marketing campaigns to run, there are many outgoing expenses to balance in order to generate real business growth. But, often, you can find yourself in a cash flow quandary. All it takes is a handful of late invoice payments, and you can find yourself in a bind, scrambling to pay necessary expenses.

With P2P lending, you can access cash much quicker than traditional lending options, and with a wider range of investor lenders, there’s a greater chance you will find a loan that meets your specific business needs.

Advantages and disadvantages of peer-to-peer lending for businesses

Like any other type of business finance, peer-to-peer lending has pros and cons. Here are some to consider:

Advantages of peer-to-peer lending

• Quick access to funds. P2P loans are granted quickly, meaning you could have funds in days after approval.
• More flexible business loan options. With many investors looking to invest in new businesses, you have a better choice.
• Less stringent criteria. Investor lenders will consider other factors, not just creditworthiness, which means you’re more likely to secure a loan.
• A good option for borrowers with bad credit or limited credit history. If traditional lenders have turned you down previously, you should consider applying through P2P platforms as you have more options.
• No risk to assets. Many loan types are unsecured through a P2P platform, so you don’t have to risk commercial assets if you don’t want to.

Disadvantages of peer-to-peer lending

• Higher interest rates. Peer-to-peer lending can come with higher interest rates. So if you’re happy to trade in faster access to funds for higher rates, then P2P could be worth researching.
• P2P lending platform fees. These platforms ask for a fee before you receive the loan amount. These fees only add to the total cost of the loan, so make sure you can afford it.
• Shorter repayment periods. Unlike traditional business loans, the repayment period for peer-to-peer lending is usually shorter, between one and five years. Always check you have enough time to repay before applying.
• You might need to sign a personal guarantee. Although your assets aren’t at risk, you might be asked to sign a personal guarantee. These guarantees are risky, so make sure you know what they are and what’s involved if your business can’t repay the loan.

Peer-to-peer lending for a business purchase

You can use a peer-to-peer loan to buy a business or expand your business premises. Some investor lenders might want to see at least two years of trading history or a good credit rating to give them the confidence to lend.

Regulation for business peer-to-peer lending

The Financial Conduct Authority (FCA) regulates every P2P lending platform in the UK. This means that both lenders and borrowers are protected. For borrowers, this means you can expect to access the help and support you need, and the lender will charge fair fees and lend to you responsibly.

Do I qualify for peer-to-peer lending?

Any UK business owner can apply for peer-to-peer funding via simple-to-use online platforms. For investors to fund your application, you’ll usually need a good credit history and to provide details about your trading history and financial circumstances. The lender will also ask you how you wish to use the funds to grow your business.

Alternatives to peer-to-peer lending

If you decide peer-to-peer lending isn’t the right choice for your business, there are plenty of funding alternatives, including business loans, short-term loans, startup loans, and family and friends' business loans.

Our free loan comparison tool helps you quickly search and compare suitable lenders within minutes. Simply fill out our short quote form, and we’ll take you immediately to our loan comparison table filled with viable business finance products.

Compare rates, total repayable, loan terms and more. Get a quote today.

About the author

Written by Richard Wilcock

Money Writer, Director and Co-Founder

Richard is one of the Co-Founders here at Capalona and has over twenty years of experience in the marketing industry, specialising in the finance sector.

Updated: December 16, 2024
Published: October 10, 2017