How does Peer-to-Peer Lending Work?

Last post: Jan 21, 2019

Peer-to-Peer lending means that instead of borrowing from one lender/institution, you borrow from many smaller ones who have clubbed together to raise your money. It differs from Crowdfunding as you are not giving away any equity. The process is arranged by a central agency (the crowdfunding platform) and you deal with just them and they in turn manage all your individual lenders. To qualify you must be trading at least 2 years, be profitable and have a good credit record.

What is Peer-to-Peer Lending?

Peer-to-Peer lending (P2P Lending) is an increasingly popular form of obtaining finance from a group of lenders rather than one lender/institution. The entire process is run by an 'agency', often known as a 'platform', who manage investments from individuals and then lend to businesses.

This form of lending can be popularly seen by growing platforms such as Funding Circle, Lending Crowd and Funding Secure. With advanced online portals that allow for users to easily invest their money and see how it's spent.

How does P2P Lending Work?

When applying your business through P2P lending, you will usually have a soft-credit check done against your business to check the eligibility for the platform. For most platforms, you'll be put into a credit bracket in regards to how much interest you are likely to pay. Borrowers are then matched directly with the investors and, with some of the more advanced platforms, these investors get to choose exactly what they wish to fund and what interest rate they wish to get back.

This can be seen as a lucrative opportunity for many investors to choose their interest rate, but this is only part of an auctioning process which will see your business pay the interest rate average.

Obtaining finance through P2P lending usually takes 7-10 working days.

What is the Criteria for P2P Lending?

  • Must be trading for at least 2 years.
  • Accounts must be profitable.
  • Have a good credit record.
  • Unsecured business loans up to a total of £350,000.
  • Terms up to a maximum of five years.

Should I Choose a P2P Loan?

There are many advantages to using Peer-to-Peer lending over traditional lending to fund your business:

  • Some lending platforms offer a 'bidding' strategy for investors in which they can bid to invest in your business depending on the interest rate. This means that you pay the lowest interest rate possible for you, based on the average bid from investors.
  • Unlike other business loans with traditional banks, you can often withdraw funds on the same working day of approval and completed paperwork. This makes obtaining your funds a seamless process.
  • P2P lending is for the most part unsecured which can make borrowing money a little more comfortable.

You can read more about the benefits and risks of a Peer-to-Peer loan here.