Peer to Peer Business Loans – A Guide

1 month ago

For freelancers and micro businesses looking for alternative business funding options to typical loans, peer to peer (p2p) loans might offer a solution.

Here’s our guide to peer to peer loans for businesses – but the usual caveat applies. We’d very much recommend that you seek professional business funding advice before making a decision on what’s right for you.

What’s a Peer to Peer Loan?

Peer to peer lending (or P2P lending) is a form of lending where individuals or businesses lend money to other individuals or businesses. It most commonly takes place through a lending platform built specifically for this purpose. 

It’s designed as an alternative to traditional bank loans, but much like any form of business funding, has both its pros and cons.

How does Peer to Peer Lending Work?

Every platform has slight differences in terms of how it operates. But loosely, the process would be as follows:

  1. You complete an application form (more on that below)
  2. If you pass the initial approval criteria, the loan is generally posted to the platform’s marketplace, where individual lenders can offer up a sum of money towards the loan. Generally (but not always) it will be multiple individuals or businesses whose money forms the loan
  3. Some platforms set the interest rate, while others have an “auction” style approach and let prospective lenders “bid” in terms of what interest they’ll lend at
  4. Once 100% of your funding is raised, you receive a loan offer and the funds

The process can often be much quicker than that of a bank loan and in some cases (not all) the interest rates are more competitive.


Pros and Cons of Peer to Peer Loans for Businesses

Pros of P2P Loans

  • The application process is generally quicker than that of a traditional business bank loan
  • It's typically unsecured
  • Typically no early repayment charges

Cons of P2P Loans

  • It's still relatively new and therefore there aren't that many commercial P2P lending platforms out there
  • Not suitable for every business
  • Minimum of 2 years' accounts and £100,000 turnover often required

What will you be asked when applying for a P2P business loan?

You will be asked a number of questions much in line with the process for any sort of business funding. They include:

  • Historic turnover and profit figures
  • Your plans for the money

Not all P2P lending platforms offer commercial loans. So you will need to be sure that you’re applying with a peer to peer lending platform that specifies loans for businesses.

Do I have to be registered a limited company?

In some cases, to acquire a specific business loan you will need to be registered as a limited company. But this varies from lender to lender. We’d suggest you enquire directly with the platform you’re considering prior to application in order to find out whether this is the case.

If you’re a sole trader, then it’s possible non commercial finance P2P lending platforms may consider your application as a personal loan (with a personal responsibility for repaying it).

What other eligibility criteria apply?

Again, it’s another of those “it depends” answers here I’m afraid. But many of the peer to peer lenders we researched specified the need for a minimum of 2 years’ accounts and an annual turnover of £100,000+.

How much can I borrow with a peer to peer business loan?

It will depend very much on your circumstances. But lending platforms typically offer loans between £5,000 and £1 million for between 6 months and 5 years.

How do I repay a P2P loan?

Peer to peer loans are typically repaid monthly and there’s usually a set repayment fee each month that stays static. Generally speaking, there are no early repayment fees. 

What’s in it for the lenders?

People and businesses who offer loans through peer to peer lending platforms (whether to companies or to individuals) are generally in it to profit.

In some cases, lenders may make more money this way than by putting the money in typical low interest savings accounts. But the main driver for such lenders is the ability to make money in the form of interest on their loans.

How do I apply for a peer to peer loan?

We don’t recommend specific providers at the time of writing and would recommend seeking professional advice.

Compare your options, check reviews and speak to a pro before making a decision about whether this type of borrowing is right for your micro business.

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