Alternative finance - peer to peer lending

Peer to peer lending for businesses

Looking for alternative sources of funding? If you need some extra money to help your business grow, you might want to consider peer to peer (P2P) business lending.

This article will help you understand what P2P lending is and how it works.

Smiling small business owner in a workshop looking at his phone while holding a pencil, with icons of a stopwatch and money symbolising time and financial management.

What is peer to peer lending?

Peer to peer lending connects businesses that need money with people who want to invest their money directly. This is an alternative form of finance to getting a loan from a traditional bank. It has become a popular option for both investors and businesses. For businesses, the approval process is generally faster, it provides greater accessibility to finance and usually comes with better interest rates. For investors, P2P lending provides an alternative investment that can potentially offer higher returns compared to traditional savings. It also allows for more diverse investment across various sectors and risk categories.

How does peer to peer lending work?

Currently, P2P lending operates by connecting borrowers with multiple individual investors through online platforms. The business looking to borrow money will complete an online application. After a short description of their business, the business looking to borrow will explain why they need funding, the desired amount, and when they can repay. You can for example use our online platform to submit an application to a peer to peer lender. Capitalise works with 100+ UK lenders, including peer to peer lenders, so that you can compare multiple options.

Once a peer to peer lender receives your application, they’ll likely check the business’ credit score as part of their assessment. They’ll also evaluate the supporting documents and details you provide to come to a decision. As the process is all online, this can be very quick, with decisions able to come back in as little as 24 hours.

If approved for a loan, you’ll receive details such as the amount, the interest rate payable, the terms and any arrangement fees.

The money lent to you will have come from a number of investors, but will all be facilitated by the peer to peer lending platform.

What can I use a peer to peer loan for?

You can use a P2P loan for almost anything that helps your business, whether it's for increasing your cash flow, buying new equipment, or hiring more staff. As long as it’s for a business purpose, you’ll be able to use the funds as you need.

What are the advantages and disadvantages of peer to peer lending?

  • Advantages of peer to peer lending

    • P2P loans are generally easier to obtain than a bank loan, especially for businesses that may not qualify for traditional bank loans due to limited credit history or lack of collateral.

    • The application process is typically online and streamlined, which means you can get funding faster, often within a few days.

    • Since these loans connect you directly with investors, the rates can sometimes be more competitive than those offered by banks.

    • Many P2P platforms offer flexible loan amounts and repayment terms, allowing you to tailor the financing to your specific needs. P2P lenders in the UK are regulated by the FCA

  • Disadvantages of peer to peer lending

    • Your business might need to provide security for the loan, such as a personal guarantee.

    • While rates can be competitive, they may also be higher than high street bank loans, especially for businesses considered higher risk.

    • P2P loans often come with additional fees, such as arrangement fees, which can add to the overall cost of the loan.

    • Depending on the platform and your business’s situation, the amount you can borrow might be less than what traditional banks offer.

What do I need to be eligible for peer to peer lending?

To be eligible for a peer-to-peer (P2P) loan, businesses need to meet certain criteria set by the lending platform. These requirements can vary depending on the lender.ere are some common ones:

  • P2P lenders will likely require that your business has been operating for a minimum amount of time. This is often at least one year, to be able to assess your business’ financial stability.

  • There's usually a threshold for your annual revenue. This figure can start as low as £50,000, but can vary greatly depending on the lender.

  • While P2P lenders can be more lenient than high street banks, they still check your business credit score. A good credit score can help secure better interest rates. However some peer to peer lenders specialise in lending to businesses with lower scores.

Applying for a peer to peer loan

Applying for a peer-to-peer (P2P) loan can be a straightforward process, especially when you know what to expect and prepare accordingly. Here’s a step-by-step to help you through the application process:

1. Evaluate your needs 

Before applying, clearly define why you need the loan. Whether it’s for expanding your business, purchasing equipment, or bridging a cash flow gap. Understanding your needs will help you choose the right loan and amount.

2. Understand how much you can borrow

Find out how much you can potentially borrow. This assessment will align your business needs with realistic financial planning. You can do this using our free Business Loan Calculator.

3. Gather necessary documents

You can gather your documentation beforehand to streamline the application process. Typically, you will need to provide annual financial statements and recent business bank statements.

4. Fill out your peer to peer lending application 

Apply for funding through your Capitalise account to access over 100 UK lenders, including peer-to-peer lenders. You’ll need to complete your application, then you will be able to send it to up to 4 lenders at once.

5. Review any loan offers

If your application is approved, you may receive offers from potential lenders. You will need to review these offers carefully, paying attention to:

  • The loan amount

  • Interest rate

  • Repayment terms

  • Any additional fees

6. Accept an offer 

You should choose the offer that best fits your needs and budget. Upon accepting an offer, you'll typically need to sign a loan agreement electronically.

7. Receive your funds 

Once the agreement is signed, the funds will usually be deposited into your business account within a few days. With some peer to peer lenders, you can receive the funds in as little as 24 hours.

8. Repay the loan

You’ll repay the loan, plus any interest, according to the agreed upon terms.

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