It’s nice to think you’re going to handle everything in your business by yourself, but the reality is that sometimes businesses (especially those on the smaller side) need additional finance for things like large purchases, expansion, investment, or sudden and unexpected costs.
While you would traditionally go to a bank for this kind of backing, the growth of technology and online services has given rise to alternative finance options.
Peer-to-peer lending is one such example, giving business owners more choice in how they borrow and invest.
But how does this actually work, and are there any potential risks to be aware of?
Let’s take a look.
What is peer-to-peer lending?
Peer-to-peer (P2P) lending connects borrowers directly with potential investors, usually through an online platform or site.
This obviously cuts out the more traditional route of going through the bank, but the main benefit is increased flexibility, and it also gives you the chance to engage with people who are excited about whatever it is you’re trying to achieve.
An example might be someone borrowing £5,000 to consolidate credit card debt, while multiple investors each fund part of the loan.
Or investors could provide cash to a business against unpaid customer invoices.
Who is involved?
There are three main parties involved in a P2P loan:
- The borrower – the person or business that needs the money and agrees to repay it with interest
- The investor/lender – the individual or organisation that provides the money and hopes to earn interest
- The P2P platform – the online company that connects borrowers with lenders
Other parties can be involved, though.
For example, credit reference agencies, payment providers, or debt collection services if payments are missed.
How do businesses access P2P funding?
You can apply to online platforms, which will assess risk and suitability in order to determine a fair interest rate.
The loan is then listed on the platforms so potential investors can decide whether or not to get involved, and in this respect P2P is quite similar to crowdfunding.
Some popular peer-to-peer lending sites in the UK include:
- Crowd2Fund – a P2P lending platform where investors lend to UK businesses seeking finance
- Rebuildingsociety, which focuses on loans to UK small and medium-sized businesses for purposes such as growth, equipment, hiring staff, cash flow, etc.
- FOLK2FOLK, which provides loans to SMEs across sectors including retail, hospitality, farming, and leisure
- Kuflink – offers bespoke short-term commercial and property-backed lending opportunities
How is the loan repaid?
Essentially, a P2P lending platform functions as a kind of middleman between a borrower and investors.
The borrower applies for a loan, and the platform assesses the borrower’s eligibility.
The loan is then listed or allocated to investors, with the borrower receiving the money once the loan is funded.
In terms of repayments, the borrower makes these as necessary and the platform distributes them to the investors (after deducting any applicable fees).
What should businesses consider?
You may still be weighing up whether to try out peer-to-peer lending or go the tried-and-tested route of borrowing from a bank.
When assessing the potential viability of a P2P platform, you first need to do some research into its reputation to ensure it’s legitimate, and this will also give you some insight into how it operates, as well as its eligibility requirements, etc.
It’s worth knowing that some of the sector’s original big names, including Zopa, RateSetter, and Funding Circle – have since scaled back or exited retail P2P lending entirely, as tighter regulation and thinner margins made the model harder to sustain. That doesn’t mean P2P is dying – smaller specialist platforms like the ones above are still active – but it’s a sign the sector has matured and consolidated rather than simply grown.
In general, though, you should consider the advantages and disadvantages of peer-to-peer lending vs taking out a more traditional loan.
To help you out, we’ll break down the main pros and cons.
Pros
In addition to greater accessibility, P2P lending generally gives you faster access to capital thanks to a quick and convenient process that can be completed over the web.
There are also flexible loan structures, with platforms offering different repayment periods, and competitive interest rates mean there’s more choice overall.
Cons
Some borrowers will face higher interest rates (e.g. those with weaker credit scores), and some platforms may charge arrangement, administration, or late-payment fees.
In this sense – and as with any kind of loan – debt is always a risk.
What’s more, P2P isn’t always cheaper than banks, and some platforms may offer fewer repayment options than a mainstream lender if your circumstances change.
Key takeaway
It’s certainly true that P2P lending can be more convenient, but borrowers should take time to compare the total cost, fees, and repayment terms carefully before taking on a loan they may struggle to pay back.
Compare the P2P loan with bank loans, overdrafts, asset finance, grants, or other types of financial aid before committing.
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