Peer-to-peer lending (also known as P2P lending) is a form of finance that has risen in popularity in recent years. It falls under the umbrella of alternative finance and is now commonly used by businesses looking to raise substantial sums of money.
The nature of P2P lending means that it is valuable for firms who have failed to obtain sufficient funding from traditional routes or are looking for something outside of the norm. It offers specific characteristics that appeal to various businesses, particularly those looking to grow.
Our guide explores P2P lending in more detail, including how it works, who can benefit and what to consider.
What is peer-to-peer lending?
P2P lending sees platforms lend pooled funding to other individuals or businesses. There is no financial institution in the middle, though online platforms are used to connect borrowers and lenders.
In most P2P scenarios, individuals, business and other institutions will contribute amounts, which are pooled to provide the funding. Any P2P platform you use will aggregate the funds and lend to businesses based on their risk profile.
As with any loan, P2P funds must be repaid over an agreed period until the balance is cleared.
Who is eligible?
P2P loans are an excellent option for SMEs looking to grow. They will fulfil various purposes, including purchasing premises and equipment, recruiting more staff or increasing your supplies.
Like any loan, P2P funding takes risk into account. Businesses with a perceived high risk may struggle to raise finance. However, P2P lending is still more accessible than banks in most cases, meaning more ventures are likely to be accepted for some level of funding.
The benefits
There are many advantages to securing a P2P loan. We’ve listed the most prevalent.
Highly competitive interest rates
P2P loans offer competitive interest rates, which lower the amount you pay each month.
This is due to a number of factors, but mainly because P2P funding tends to rely on online platforms, easing administrative burdens and costs.
It makes P2P lending a cost-effective option for your company.
Flexible terms
P2P loans vary in length and amount. There are options to cover short-term gaps or more extensive financial needs.
Whatever you need, it’s possible to get a P2P loan that fits your requirements. This includes how long you want the loan, the amount you need to raise and your repayment affordability.
By finding a loan that suits you, you reduce the risk of financial pressure whilst meeting your goals.
Improved accessibility
P2P lenders tend to be open to a broader range of businesses than traditional lenders. Although the risk is still considered, it is less restrictive, meaning more companies may be accepted even if they have struggled to get funding previously.
Similarly, the turnaround time is much faster. Most P2P facilities are online-based, so you will be notified within days. It makes the process easier, as applications can be submitted online anytime.
Work with willing lenders
Investors, whether individuals or institutional investors, who sign up for a P2P platform are actively looking for a good return on their money and platforms invest in profitable businesses to deliver this. Some institutional investors may have specific criteria that the platform needs to meet, such as sector specific lending.
When applying for a P2P loan, you might meet sector specific criteria for that platform which will increase the likelihood of your application succeeding. However, this data is not commonly disclosed. Regardless, you will have the knowledge that platform that you select wants to help you succeed.
Considerations
Alongside the benefits of P2P lending, there are factors you should contemplate before committing. We explore them below.
Overcoming risk
As we have already mentioned, P2P lenders, as well as other lenders, will analyse the risk you pose. They will consider many things to determine how eligible for funding you are.
A business with perceived high risk (such as those with a poor credit history) will be less likely to get accepted. Some factors will lower the risk, including a positive balance sheet and profit performance, a good credit history and security (usually through assets or a personal guarantee).
If you are high-risk, you will also have to pay a higher interest rate or be turned down for funding.
Additional fees
Although a P2P loan is cost-effective compared to some other forms of funding, there may still be fees you need to pay. These fees are typically associated with administration of the platform and are typically higher than more traditional lenders.
There will be fees around late or missed payments.
The specific fees charged will depend on the lender and the P2P platform, so be sure to check them before committing to anything.
Protection
Despite their best efforts, some companies may struggle to repay the loan.
Most P2P lenders require a personal guarantee for the full loan value, which offers less protection to businesses and their directors that fail to make a payment than a traditional loan. Your case could be passed onto a debt collection agency that will take you to court, placing you into more significant debt and potentially harming your reputation.
It is worth checking the policy of any P2P platform before you sign up to understand the ramifications for borrowers and if any protection is offered.
Early exit costs
In the event of you wishing to pay off your loan early, a number of P2P lenders require you to pay off the outstanding interest due under the contract as well as the capital
Most traditional lenders and some P2P lender allow you to pay off the loan early and charge only the interest due at that time plus the outstanding capital.
Remember to check your terms to see if your loan will allow early payment and what the costs are.
How to apply
Applying is easy if you want to pursue a P2P loan for your business. We’ve broken it down into three simple steps.
Find a P2P platform
There are numerous P2P platforms available, each with criteria which is slightly different. Research the various options to find a platform that appeals to you most.
When comparing platforms, there are a few things to check, including:
- Information you need to provide
- Eligibility criteria
- What type of funding is given and how
- Any fees charged
- Policies (including around missed payment)
- Turnaround time
This will allow you to find an option that best suits your needs.
Create your online application
Once you have chosen your platform, you need to sign up. Most will ask you to submit specific information about your business, which will cover your financial history and why you need funding.
Remember to optimise your application to showcase your company effectively, as this will make you more appealing to the lender. Having up to date management information is extremely important.
More lenders are signing up to open banking and open accounting, allowing them direct access. As a result, they may not accept applications if you are not willing to share direct feeds to your banking, accounting systems or both.
Await a decision
Once you have submitted your decision, you must await a response. The platform will usually inform you whether you have been accepted, alongside information about the lender and terms.
Due to their use of technology, you can expect a response within a few days.
If you aren’t successful, it may be worth reapplying in the future or considering another platform. A finance broker will assist you in selecting the right offering for your business.
In summary
Peer-to-peer lending is a valuable source of finance outside of ‘conventional’ routes. By pairing willing lenders and borrowing businesses together, mutual benefits are shared. For companies, this means competitive interest rates, flexible terms and increased access to finance.
However, P2P funding isn’t for everyone. You still need to undergo an application process and face rejection if you do not meet the risk criteria.
That being said, it offers a faster alternative solution for businesses who may otherwise struggle with traditional lending routes or simply wish to enjoy the benefits of a P2P arrangement.
If you are considering P2P finance for your company, we will take you through the ins and outs to understand the impact. We will locate the right funding partners to take your financial journey forward and optimise your application.