Is a Peer-to-Peer (P2P) Business Loan Right For Your Business?

The right finance can be make or break when it comes to growing your business, and recent years have seen the business finance market evolving at a rapid pace, with multiple new funding options to choose from. For those looking to raise money outside of traditional lenders, Peer-to-peer (P2P) business loans are emerging as a popular choice for many smaller businesses.

So, if your business is looking for extra capital, is a P2P business loan a good option?

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What’s peer-to-peer (P2P) lending?

Peer-to-peer (P2P) lending is a way to directly connect individual lenders (that’s the ‘peers’) with borrowers through an online P2P platform. As a result multiple investors lend you smaller amounts to hit your loan target, rather than one single institution.

These platforms bypass traditional banks and financial providers, making it easier for businesses to access funding. It also gives individual investors a way to support businesses who needs funding, while making a good return on their investment.

How does a P2P business loan work?

A P2P business loan works on exactly the same principle. Instead of approaching your bank manager for a business loan, you set up an application for a business loan through your P2P platform of choice. This is also known crowdlending and peer-to-business (P2B) lending

Individual private investors can lend you small amounts towards your total, until you’ve reached your funding target, at which point your money can be drawn down. 

How does P2B differ from traditional bank loans and alternative lenders

Traditionally, you went to your bank manager to ask for a business loan. But this approach is becoming less common as high street banks change their ways of working, while SMEs look for more speed and flexibility.

Here are five of the major differences between the traditional funding routes and the P2B approach to lending: 

1. Application and approval process: A traditional bank loan takes days of form-filling and can take weeks, or months, to be signed off. A P2B loan is a completely digital process, with a lightning-fast application process and funding secured within hours.  
2. Interest rates and lending criteria: Bank interest rates can be high, with the criteria for lending to businesses relatively strict and inflexible. P2B platforms consider broader financial indicators beyond traditional credit scores. Funding can be accessed at competitive interest rates, even if you have a limited credit history.
3. Transparency of the funding: Bank funding is generally quite opaque and controlled via complex internal lending policies. A P2B loan is a transparent process where individual investors directly fund your business opportunity,
4. Flexibility of the loan and repayments: P2B lending platforms offer significant loan flexibility, with ways to customise your repayment schedules, easier early settlement options and adaptable financial structures.
5. Technology and customer experience: Banks are slowly moving into the digital age, but the changes to their systems are slow and highly bureaucratic. P2P lending technologies turn the loan application into a fully digital experience with real-time tracking, instant communication and comprehensive online dashboards.

What are the advantages of peer-to-peer business lending?

There are significant differences between a business loan application through your bank and a P2B loan through a P2P lender.

So, what are the major advantages of peer-to-peer lending in business?

• Competitive interest rates on your loan: P2B loans can have competitive interest rates compared with traditional bank loans, but the rate will depend on a number of factors, e.g. your business credit score, industry and the profile of the business.
• Quicker application and approval processes: P2B loan applications happen online, cutting out the red tape of a traditional bank loan. Loans can be approved in hours, rather than weeks, getting you funded quicker and with less hassle. 
• Accessibility for businesses with limited credit histories: Banks are reluctant to lend if your business has a poor credit history. P2P/P2B platforms are more accommodating and will offer loans, but with increased interest rates for your loan repayments. 

P2B loans can offer a helping financial hand when other more restrictive routes to funding just aren’t available. 

What are the disadvantages of peer-to-peer business lending

Peer-to-peer lending for business startups and small family businesses can be an excellent fit, especially when some of the more traditional routes to funding are unlikely to bear fruit. 

However, there are some disadvantages of peer-to-peer lending in business:

• Higher risk for lenders may lead to stricter terms for borrowers: If your business has a poor credit history, lending to you poses a higher risk to the lender. As a result, interest rates are likely to be higher and the overall terms of the loan will be more strict. 
• Not suitable for large funding needs or complex projects: P2B loans tend to offer smaller amounts of funding. If you need a large capital injection, or your ROI on the project is unpredictable, a P2B loan is not your best option.
• Limited regulatory protections compared to traditional financial institutions: P2B providers are regulated by the Financial Conduct Authority (FCA), just like the big banks. But P2B is not covered by Financial Services Compensation Scheme (FSCS) and the regulatory framework within the wider P2P industry is still evolving. 

The emerging peer-to-peer lending market in the UK

The P2P business lending market in the UK is developing fast, with some established players and a number of new providers appearing as P2P becomes a more popular funding solution.

In 2013, the collective revenues for UK P2P lending were £20.2m. The market has grown considerably in the past decade, with total annual revenues for UK P2P lending set to hit a new high of £398m in 2024, according to research by IBIS World.

Providers in the P2P/P2B market include:

• Crowd2Fund aims to connect UK investors with British businesses that need additional capital. Investors can invest in your business and earn tax-free through an Innovative Finance ISA (IFISA). There are flexible ways to borrow, including equity and debt finance, to help you source the funding you need.
• Folk2Folk offers secured loans to help your business grow, develop, or diversify. Folk2Folk champions the trickle-down economic benefits of local lending, through what they call FOLKONOMICS™
• rebuildingsociety.com offers a trusted and transparent way for individual investors to lend to your business, making the finance process clear to both parties. Secured and unsecured loans are available, allowing you to borrow towards your growth plans, asset purchases or to boost your cash-flow position.
• Triodos Bank is run and regulated as a bank, rather than as a P2P provider. Its aim is to fund sustainable, green projects, businesses and charities and to make money work for positive change in society. If you’re looking to fund a sustainable project, this is a very attractive USP.

Here’s an overview of how loans from these five providers compare:

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P2P/P2B providers are generally registered with the FCA and regulation has been tightened after the past decade, with a tighter regulatory framework introduced in 2019.

Is peer-to-peer lending right for startups and small businesses?

The loan amounts available do vary from provider to provider, but as a rule of thumb, a P2P/P2B loan will usually offer smaller amounts of capital. 

As such, there’s a trend for peer-to-peer lending for business startups, where smaller injections of capital are needed to get your business idea off the ground. 

For larger corporations who need large-scale capital investment, or enterprises that have a more risky lending profile, P2P/P2B may not be the route to go. 

Here are the key steps for taking out a P2B loan:

1. Research: Research and compare the different P2P platforms to find which one is the best fit for your business, industry and funding needs.
2. Eligibility: Check the eligibility criteria for your chosen P2P platform and the minimum requirements for applying for funding.
3. Financial information: Gather the required financial documents and business performance data, so you have all the necessary financial information to hand.
4. Application: Complete the online application form and fill out the business and personal information that the lender needs.
5. Supporting documents: Submit any supporting documentation, for example, the company’s bank statement, accounts and cashflow forecasts.
6. Credit checks: Wait while you undergo the required credit checks and go through the platform's risk-assessment process
7. Accept the offer: Review the offer and accept the loan terms and interest rates from your provider.
8. Identity and AML checks: Complete the important identity verification and anti-money laundering (AML) checks to meet the compliance requirements.
9. Accept the T&Cs: Sign the loan agreement from your chosen lender and accept the platform's terms and conditions for the loan.
10. Get funded: Receive the funds and begin your repayment plan, according to the terms of your loan agreement.

Before you enter into any kind of finance agreement, it’s important to take a step back and to consider if a P2P business loan is the best way for you to fund your business.

Evaluate your need for P2P small business loan and ask yourself a few core questions:

• Does a P2P business loan offer enough capital to fund your business needs?
• Will the funds be available fast enough to meet your funding timeline?
• Can the business cover the repayment schedule without negatively impacting cash flow?
• Is the P2P platform a reputable lender and are they covered by FCA regulation?
• Are there other funding channels that may be a better fit for the job?

iwoca Flexi Loan: Your flexible Alternative to peer-to-peer business loans

If you’re in need of additional finance, but don’t feel that a P2P business loan is the best solution, don’t worry. There are other lending options open to you.

An iwoca Flexi Loan can often be a quicker and for more flexible way to borrow:

• Apply in minutes: The Flexi Loan is designed for small business owners, with a fast and simple way to apply for your loan that can take less than five minutes from start to finish. 
• Decide how much to borrow: Borrow £1,000-£1,000,000 for as little as one day, or as much as five years, with our flexible business loans. 
• Use your funds: Funds are typically available in hours, not weeks. Draw down as much as you need and only pay interest on what you use. 
• Repay or top up: We don't charge early repayment fees, so you can settle the loan whenever you want. If you need more funds, apply for a top up.

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