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A Guide to Peer-to-Peer Lending

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Last editedJun 20212 min read

It’s a fairly new concept, so you may not have encountered peer-to-peer lending before. However, it might be key to the business funding you need. But what is peer-to-peer lending? Keep reading to find out more, starting with our peer-to-peer lending definition.

What is peer-to-peer lending?

Peer-to-peer lending is, essentially, when you borrow money from another person or persons. It’s considered a new and alternative way to raise funds compared to traditional routes like getting a bank loan or approaching investors. That may sound basic, but it really is about reaching out to people in the hopes of securing funding. It’s like asking a friend of a friend, but super powered by the internet. You may also see this referred to as crowd lending, which is similar to crowdfunding in that anyone can contribute (with the important difference being that your lenders expect to be paid back).

How does peer-to-peer lending work?

Using peer-to-peer (P2P) lending, UK businesses can find the investors they need by connecting with would-be lenders online, or through offline services like brokers. It’s extremely easy to get started with P2P lending and lenders can often offer as little as £10. In many cases, the process is as simple as logging on, answering a few questions about the business and loan you need, and seeing which lenders are happy to provide funding. Peer-to-peer lending UK sites can usually provide instant results regarding the availability of lenders, meaning you can get funding secured in a matter of days.

Peer-to-peer lending advantages and disadvantages

P2P lending has gained a lot of traction over the last few years, but it’s important not to get lulled into a false sense of security. Yes, with peer-to-peer lending, bad credit, long waits, and endless admin are less of an issue, but it also often comes with higher interest which can be a big drain on your company. Here’s a quick look at peer-to-peer lending advantages and disadvantages you should consider:

P2P lending advantages

  • Options – If one bank rejects your loan, it's likely to be a similar case with other banks. However, there are lots of platforms and lenders for P2P lending, each with their own take on risk vs. reward.

  • Small or large – Peer-to-peer lending can be used to access loans of different sizes, from relatively large sums to the small injection of cash your business might need to kick on to the next level.

  • Ideal for poor credit – With peer-to-peer lending, bad credit doesn’t automatically prevent you from being eligible for a loan.

  • Simple – It’s as easy as a few clicks to get the money you need, so long as someone is happy to give it to you.

  • Full control – Unlike traditional investors, peer-to-peer lenders don’t expect to get a portion of your business in return for their investment, your company is still 100% yours.

Peer-to-peer lending disadvantages

  • Interest rates – Rates may be higher than a traditional bank loan.

  • Credit rating – Lenders will check your credit score, which will count as a hard inquiry (impacting your rating).

  • Security – Peer-to-peer lending isn’t covered by the Financial Services Compensation Scheme, so lenders aren’t as well protected.

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