Peer-to-peer lending

Peer-to-peer lending (P2P) is a type of business loan by a large number of private investors (individuals, businesses or institutions) to your business, usually through an online platform. The idea is that lenders and borrowers get a better rate than they would through banks – plus decision lead times are significantly shorter. P2P is also known as debt crowdfunding or loan-based lending.

Peer-to-peer lending (P2P) is different to standard business loans. P2P matches private investors looking to invest their money with people who want to borrow it. In theory, compared to banks, P2P pays higher interest to lenders and charges lower rates for borrowers. The stronger your business profile, the lower the interest rate on your loan.

You apply for the loan directly to the P2P provider, even though technically you’re not actually borrowing the money from them but from a collection of private investors (individuals, businesses or institutions) who have signed up via a P2P lending company. On some platforms, these investors can choose the businesses they lend to. On other sites their money is automatically divided between a number of borrowers.

Peer-to-peer lending is sometimes called debt crowdfunding or loan-based lending – it’s debt financing rather than equity financing (see equity crowdfunding) or donations.

Usually peer-to-peer lending platforms offer unsecured business loans. This means you don’t need any security and you can set up your loan quickly. P2P is one of the more accessible forms of alternative finance.

What are the pros and cons of P2P lending?

Peer-to-peer (P2P) lending offers several advantages and disadvantages. On the positive side, it provides:

• Access to funding: P2P lending platforms offer an alternative source of funding for borrowers who may not qualify for traditional bank loans.
• Faster approval: The application and approval process is often quicker compared to traditional lending institutions, enabling borrowers to access funds faster.
• Diverse borrower base: P2P lending allows small businesses to access funding from a diverse pool of investors, potentially offering more favourable terms.
• Competitive rates: P2P platforms can sometimes offer lower interest rates for borrowers compared to traditional lenders, particularly for those with good credit.

However, there are also drawbacks to consider:

• Higher interest rates: Borrowers with less-than-perfect credit may face higher interest rates on P2P loans compared to traditional bank loans.
• Limited regulation: P2P lending platforms may have less regulatory oversight than traditional financial institutions, which can expose investors and borrowers to higher risks.
• Platform reliability: The success of P2P lending relies heavily on the reliability and stability of the platform itself. If a platform fails or experiences technical issues, it can disrupt lending operations and harm both borrowers and investors.