Peer-to-peer lending has become a popular alternative financing source in the UK. That is because it not only provides loans to individuals but also offers funds to businesses. So you can take loans directly from the investors instead of choosing more traditional ways of lending. No matter, you need money to boost your cash flow, grow your business or fill revenue gaps. So it can be with considering alternative financing routes such as peer to peer lending. If you do not know much about this type of lending and wonder how it works and how it differs from conventional borrowing read on to know all the information.
What Is Business P2p Lending?
P2p lending is also known as marketplace lending and has become a vital funding source for startups and SMEs in the UK. It helps businesses take business loans directly from the investors through online platforms, called p2p platforms. So it removes the need for intermediaries or traditional banks. Individuals who are willing to lend their money hold their capital in p2p platforms. These platforms match the lenders with businesses that want to borrow money. As a return, the lenders can earn high-interest rates from p2p loans. Since its establishment in 2005, p2p platforms have lent billions to businesses in the UK. You can take a p2p business loan to support almost any business purpose as you can add a lump sum amount into your operation.
What Are P2p Lending Platforms?
These are the websites working to match private investors with potential borrowers and carry out transactions between them. The platform does not lend the money on its own, but it arranges the loan on behalf of investors, sets loan terms, and completes the transaction processes.
How Does P2p Business Loan Work?
Suppose you decided to take a business loan through p2p lending platforms. It is how it will work for you:
- Once you have shopped around and chosen a platform that you think is right for your business, you need to fill out an online application. You also have to mention how much amount you want to borrow and for how long. Like all other business loans, for taking out a p2p loan, you have to provide some necessary information like financial records, bank statements, and business plans.
- The platform decides the risk of lending money to you depending on your credit score and the information you provided about your business. If your credit score is good, you can get a loan at a low-interest rate. Some platforms set interest rates via auction, which means the lenders bid for the lowest interest rate.
- Once your loan application is approved, the platform matches you to a lender who is ready to lend you the required amount.
- Depending on your loan agreement, you have to repay the loan amount with the interest rate either monthly or at the end of loan terms. You may also have to pay an arrangement fee to the p2p platform.
How to Choose a Business P2P Lender?
When you are researching and comparing different p2p platforms to choose the right one, you must consider the following things:
- The minimum and maximum amount that you can borrow
- The process for missing payments.
- The penalties if you repay the loan amount early.
- Any fees charged.
- If your business needs any specific turnover to qualify for the loan.
- The interest rate on loan.
Take proper time to check whether you are comfortable with the processes of the platform. You should also consider customer feedback to check the transparency of the platform.
How to Apply for Business P2P Loans?
You can apply for a loan directly through the p2p platforms or through a broker. Like all other loan providers, p2p lenders want you to prove that you can afford to repay the loan. You must be an owner or director of a registered company to apply for a loan. Other eligibility criteria vary from platform to platform. However, you must describe the use of the loan, the amount you want to borrow, evidence of how you will repay the loan, your annual turnover, and up-to-date management accounts.
Advantages of Business P2p Lending
There are several benefits that you can take by using p2p business loans as an alternative finance route. Some of which are as follows:
- It is a straightforward and speedy process to take out a p2p business loan. The application is approved in a short time compared to conventional bank loans. And sometimes funds are transferred to your accounts within days.
- Most of the p2p loans are unsecured. It means that you do not need to use any of your valuable assets as collateral or give renders any equity in your business.
- Peer-to-peer lending platforms offer a wide range of loan amounts and terms so you can borrow an amount that is enough to fulfill your requirements. Some p2p platforms do not have any minimum amount of money you can borrow.
- P2p loans are highly accessible, especially for startups and small businesses. It gives you access to hundreds of private lenders of all sectors.
Disadvantages of business P2p Lending
P2p business loans might not suit all the businesses, and like other financial products it also comes with some disadvantages that include:
- The platforms earn money by charging fees from lenders and borrowers. Such fees can increase the borrowing cost and make your loan expensive.
- The interest rates of p2p business loans can be higher than the conventional bank loans.
- If you cannot repay the loan amount on time, you must pay the late repayment charges. In severe cases, the platform may pass your debt to the court or debt collection agency that can impact your credit score.
Now that you know how peer to peer lending business loans work and their pros and cons, you can now decide whether it is a suitable loan for your business or not. You should choose a platform that is FCA regulated, follow best lending practices and offer competitive rates.