A Guide to Peer-to-Peer Lending for Small Businesses


Peer-to-peer loan is an alternative option for small businesses looking for financing. Instead of borrowing money from your bank or hiring an angel investor, an online platform connects you with people willing to lend you money.

But how exactly does peer-to-peer lending work? And how secure is peer-to-peer lending? This guide explains more.

What is peer to peer lending in the UK?

Peer-to-peer lending is often referred to as “innovative” financing because it is a new way to obtain financing, different from traditional methods, such as going to your bank.

Businesses can get loans quickly, while savers can usually get better returns than the interest rates offered by banks (although innovative finance is generally seen as something closer to investing than to investing). ‘saving).

Peer to peer lending platforms operate like a marketplace. You sign up and apply for a loan online. If you are approved, investors can find you in the market and use their own online account to lend you money. The interest you pay on the refunds is then distributed to investors.

Peer-to-peer lending is also known as debt crowdfunding or crowdfunding. This is because you could have a lot of investors in your business at all times.

Peer to peer lending platforms for businesses in the UK include Funding Circle and LendingCrowd.

Business loan between individuals: how does it work?

When you apply for a business loan through a peer-to-peer lending platform, the platform will usually ask you for the same type of information as a bank:

But the process differs after the platform approves you. Instead of lending you money directly, the platform gives its pool of investors the option of lending you money. These people lend you small amounts until they collectively add up to the amount you want to borrow.

Some platforms set the interest rates themselves, while others have an auction system where investors bid for the interest rates, which you have to accept.

You make redemptions through the platform which are then distributed to investors. The platform may also charge a fee.

How secure is peer-to-peer lending?

Some peer to peer lending platforms have collapsed, including Lendy and Funding Secure.

Much of this seems to be due to bad business practices. The Daily Mail reported in 2019 that Funding Secure was guaranteeing loans against inappropriate assets, including in one case a library of 5,000 Italian books that were subsequently unable to be sold.

This highlights the risks associated with securing funding in a booming industry. It is important to do your research.

The FCA has stepped up its review of peer-to-peer lending platforms, introducing new rules to offer more protection while allowing businesses and investors to reap the benefits of innovative finance.

Peer to peer lending platforms are regulated by the FCA. You can search the Financial Services Register to see what a business is regulated. You can also search online reviews to learn more about the reputation of a peer to peer platform.

Advantages and disadvantages of the loan between individuals for businesses

Benefits of peer-to-peer lending

it’s accessible – as the process takes place online, you bypass the banks. This can make it easier to apply for finance and sometimes means lower fees (for example, no fees for early repayment). And because it is flexible, both large and small loans are available.

It’s quick to apply for a loan and get your money – as mentioned, with peer to peer lending, you bypass the banks. As long as you are approved, the process may take a few days.

Business loans are generally unsecured – the platform must approve you, so it will take a close look at your business information. But the advantage of this review is that the loans will generally be unsecured.

Disadvantages of peer-to-peer lending

View interest rates and fees – they can be higher than banks, but they can also be very competitive for strong companies. It is best to compare your options before choosing.

They are new – because it is a new type of finance, some platforms have not been without problems, both technological and regulatory. As mentioned, do your research on the best platforms to go with it.

No relationship building – as the loan between individuals is done online, you do not have the advantage of working face to face with the advisers of a bank. This may be suitable for some businesses, but others may require a more personal touch.

Have you considered the loan between individuals to finance your business? Let us know in the comments below.

Photograph 1: Artem Varnitsin / stock.adobe.com

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