What small businesses need to know about peer-to-peer lending

Business Loans

If your business is ready to grow, or if you need a boost to your working capital, there are plenty of options to consider. One of the latest additions to the business finance space is peer-to-peer loans. Often promising lower interest rates and a more ethical route to funding, peer-to-peer loans can seem like an attractive prospect, but are they ever a better option than a regular business loan?

Who becomes a peer-to-peer lender?

Peer-to-peer loans for businesses are offered by individual investors via an online platform that matches lenders with borrowers. Lenders often want to lend to businesses through a peer-to-peer platform as an alternative to making other, potentially less lucrative, investments. Some lenders will have a higher appetite for risk than others and the online peer-to-peer lending platform helps to make matches that work for both parties.

How do peer-to-peer loans work?

Businesses that are looking for funding start by filling in application forms, just like with any other loan. More detail may be necessary, however, as lenders tend to want a detailed picture of a business before committing to lending. These are not institutional lenders, but members of the public who are looking for generous returns on their investments.

Business finances are checked alongside credit reports, and a decision is made on whether a borrower is eligible for a loan or not. If they are eligible, the platform assigns a risk level to their application and the details are published for investor consideration.

Sometimes decisions can be made quickly, while other platforms may need more time to analyse the data and find the right investors for a particular project. Be prepared to wait weeks for the funding to come through.

Is peer-to-peer lending expensive?

Each borrower looking for a peer-to-peer loan will have to enter their details into the platform of their choice, where their credentials will be checked to see if a match can be made with investors. If an applicant is accepted by a platform for a loan, their terms and rates will depend very much on their individual circumstances.

Obviously, the cost of a business loan is impacted by things like your credit score and financial situation, but peer-to-peer loans are often even more personalised, in terms of rates, fees and other costs. Once you’ve been approved, some platforms can get the money to you on the same day, while most may take longer. You may also be liable for an arrangement fee for the loan.

Is this type of lending difficult to get?

Peer-to-peer loans can be more difficult to get than alternative online business loans. They are marketed as a good alternative to bank loans and they may offer better rates and more relaxed eligibility criteria than banks.

Most peer-to-peer lending platforms require a minimum trading history of between one and two years. A minimum turnover is also often applicable, which means you’ll need to be running an already-established business before applying. No start-ups here!

Minimum loan amounts can also be much higher than those offered by alternative online lenders, while maximum loan values may rise to upwards of £5m. This means that peer-to-peer lending might be more appropriate for larger businesses looking for larger loans repayable over a longer period of time. Micro-businesses and smaller SMEs may find themselves ineligible for peer-to-peer loans.

Is peer lending the right kind of business credit for you?

This depends on several factors. When looking for a peer-to-peer loan, consider the following:

  • Is your business eligible?

  • Does the platform charge arrangement fees?

  • Will you need to provide a personal guarantee to secure a loan?

  • What are the bottom and top end of the platform’s interest rates?

  • Does the platform have good customer feedback?

  • How long will it take for the money to come through if you’re successful?

If you’ve been turned down for a business loan recently, you may struggle to secure a peer-to-peer loan, as rigorous credit profiling is par for the course when applying for this type of funding. Platforms are responsible for gathering detailed information about a business’s credit history in order to assign a personalised interest rate and risk score to each applicant. If your credit history isn’t perfect, you may find that peer-to-peer loans are more expensive than standard online business loans, for example.

Comparing a business loan with peer-to-peer lending

Peer-to-peer lending, as a fairly new form of business finance, certainly has its place as an alternative to traditional bank loans. Business owners no longer have to try to appeal to bank managers and building societies for loans with high-interest rates, little competition and strict inflexible criteria and terms.

Times have certainly changed, and so has business finance. Peer-to-peer loans, along with other alternative financing options like crowdfunding and invoice financing, offer greater choice for business owners. However, if you are a smaller business needing very quick access to working capital on flexible terms, an unsecured online business loan from a direct lender, like mcl finance, could be the right option.

Our lending criteria are generous and we accept applications from business owners with less-than-perfect credit histories and less than a year’s trading history. We also offer competitive interest rates, flexible repayment terms and fast funding, which could see you have your money in your account within hours of being accepted for a loan.


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