If you’re a small business owner, you may be keen to search for a loan to help grow your company. Finding a business loan with the lowest possible interest rate can increase your chances of using the borrowed money to create tasty profits.
Peer-to-peer business loan companies aim to make this easier than ever. These firms provide a platform to link investors looking for bank-beating returns with businesses seeking competitively priced loans. The theory goes that cutting out the middleman (i.e., the high street bank) reduces a lot of overhead, and these savings can be passed onto customers.
Other than competitive rates, what are the advantages for businesses looking to borrow?
Because the P2P platforms are all relatively new and well-versed in using smart tech to deliver an efficient service, the application process for a peer-to-peer loan is typically very streamlined and straightforward.
The approval process can often be largely automated, using algorithms that assess your situation and risk by considering a range of data points. That means you won’t have to sit down for hours on end with the bank manager. It may also mean that decisions can depend on more than just your credit score.
What are the disadvantages for businesses looking to borrow?
Some (but certainly not all) peer-to-peer lenders may be more risk-averse than traditional lenders. That’s because they rely on investors coming back to them time and again, which won’t happen if they lose their money. If you’re deemed a risky prospect, there’s no guarantee you’ll receive a market-leading interest rate or that investors will be found for you.
Depending on how the P2P platform operates, successful applicants may need to wait until enough willing investors have come forward to fund their loan fully, which could mean an indefinite delay. If time is of the essence, check how the lender you’re considering handles the funding process.
Some P2P lenders may charge a fee if you repay your loan early to try to recoup platform running costs and lost earnings for investors.
What loans are available?
Businesses that successfully apply for a peer-to-peer loan usually receive a lump sum and make monthly repayments (including interest). It’s sometimes possible to borrow on an interest-only basis, paying interest each month and then interest plus the capital at the end of the term.
Peer-to-peer loans may be secured or unsecured. The typical term ranges between six months and five years, and your interest rate and monthly payments are fixed.
Is my company eligible?
Each provider has its own minimum eligibility criteria, but you’ll typically need to be a sole trader, director of a limited company or owner of a limited liability partnership (LLP). Often, you’ll need to provide at least two years of business accounts, and you may only be considered if your turnover is above a specific amount.
How do I apply for a peer-to-peer business loan?
You’ll apply for a peer-to-peer loan on the lender’s website. The application typically takes around 30 minutes. You’ll select the type of loan you want, submit personal details and enter financial information about your business.
The lender reviews your application. This includes a credit check, risk assessment and an evaluation of any security provided. The interest rate offered is based on your perceived risk of defaulting. You can expect to be offered a rate within 48 hours, although it can be quicker.
If your application is approved, it is posted on the online marketplace for investors to fund your loan. Your loan may be funded by one or several investors. Either way, the peer-to-peer lending company arranges for you to repay investors directly, usually via direct debit.
What fees are involved?
Peer-to-peer lending companies may charge a “product” or “application” fee to maintain their online platform. Alternatively, the running costs have been factored into the interest you’ll pay.
However, if you repay your loan early, you may have to pay an admin fee if the platform hasn’t covered its costs. When you request to repay early, this will all be calculated in a “final settlement figure”.
Check the small print for information on the fees before choosing your peer-to-peer lending company to avoid a nasty surprise.
Bottom line
Peer-to-peer business loans could be a great option if you’re a business looking for a loan with competitive rates or even an investor looking to make great returns. However, peer-to-peer loans aren’t protected as well as traditional loans. The lender may, for example, pass on the failure to repay your loan to a debt collection agency to collect any outstanding amount owed. It’s always best to research before making any commitments to make sure you’re getting the best deal.
Frequently asked questions about peer-to-peer business lending
If you apply for a loan, you’ll be credit-checked, and this leaves a small (and usually short-lived) dent in your business credit score. Several applications in a short time could make it harder to be approved for credit in the future. Timely repayments boost your credit score, while late repayments harm it.
Peer-to-peer lending is arguably as safe for borrowers as a traditional loan. Investors carry the biggest risk as there’s no guarantee they’ll receive their money back when a borrower defaults.
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Chris Lilly is Head of publishing at finder.com. He's a specialist in personal finance, from day-to-day banking to investing to borrowing, and is passionate about helping UK consumers make informed decisions about their money. In his spare time Chris likes forcing his kids to exercise more. See full bio
Chris's expertise
Chris has written 602 Finder guides across topics including:
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