Peer-to-peer business lending

Peer-to-peer business loans aim to offer cheaper rates and an easier application process than deals from more traditional lenders.

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If you’re a small business owner, you may be keen to search for a loan to help launch your company to the next level. By finding a business loan with the lowest possible interest rate, you 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 by cutting out the middle man (i.e. the high street bank), a lot of overhead is reduced 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 taking into account 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 be dependent 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 who successfully apply for a peer-to-peer loan will usually receive a lump sum and make monthly repayments (including interest) on this. 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 therefore your monthly payments – will be 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 will take some time to review your application. This will include a credit check, risk assessment and an evaluation of any security provided. The interest rate offered will be 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 will arrange 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 in order 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 find that you 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 for you in a “final settlement figure”.

Make sure to check the small print for information on the fees before choosing your peer-to-peer lending company to avoid a nasty surprise.

Frequently asked questions about peer-to-peer business lending

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