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Peer to peer lending: how it works for small businesses

3-minute read

Sam Bromley

Sam Bromley

15 October 2021

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Peer to peer lending is an alternative option for small businesses looking for finance. Instead of borrowing money from your bank or pitching to an angel investor, an online platform matches you with people willing to lend you money.

But how does peer to peer lending work exactly? And how safe is peer to peer lending? This guide explains more.

What is peer to peer lending in the UK?

Peer to peer lending is often called ‘innovative’ finance because it’s a new way of getting funding that’s different from traditional methods, like going to your bank.

Businesses can get loans quickly, while savers can usually get better returns than interest rates on offer at banks (although innovative finance is usually seen as something closer to investing than saving).

Peer to peer lending platforms work like a marketplace. You sign up and apply for a loan online. If you’re approved, investors can find you on the marketplace and use their own online account to lend you money. The interest that you pay on repayments is then distributed to investors.

Peer to peer lending is also known as debt crowdfunding or crowdlending. That’s because you could have lots of investors in your business at any one time.

Peer to peer lending platforms for businesses in the UK include Funding Circle and LendingCrowd.

Peer to peer business lending: how does it work?

When you apply for a business loan through a peer to peer lending platform, the platform will usually ask for the same sort of information as a bank:

But the process differs once the platform approves you. Instead of lending you the money directly, the platform gives its pool of investors the opportunity to lend you the money. These people lend you small amounts until it collectively totals the amount that you want to borrow.

Some platforms set the interest rates themselves, while others have a bid system where investors bid for the interest rates, which you have to accept.

You make repayments through the platform that then get distributed to investors. The platform may also charge a fee.

How safe is peer to peer lending?

Some peer to peer lending platforms have collapsed, including Lendy and Funding Secure.

This largely seems down to poor business practices. The Daily Mail reported in 2019 that Funding Secure secured loans against inappropriate assets, including in one case a library of 5,000 Italian books that were subsequently unable to be sold.

This does highlight the risks involved with securing finance in a burgeoning industry. It’s important to do your research.

The FCA has increased its scrutiny of peer to peer lending platforms, introducing new rules to offer more protection while still allowing businesses and investors to take advantage of the benefits of innovative finance.

Peer to peer lending platforms are regulated by the FCA. You can search the Financial Services Register to see what a firm is regulated to do. You can also search online reviews to find out more about a peer to peer platform’s reputation.

Peer to peer lending advantages and disadvantages for businesses

Advantages of peer to peer lending

It’s accessible – as the process takes place online, you bypass the banks. This can make it easier to apply for funding, and sometimes means lower fees (for example, no fees for early repayment). And as it’s flexible, both small and large loans are available.

It’s fast to apply for a loan and get your money – as mentioned, with peer to peer lending, you bypass the banks. As long as you’re approved, the process can take just a few days.

Business loans are usually unsecured – the platform needs to approve you, so it will look closely at your business information. But the benefit of this scrutiny is that the loans will usually be unsecured.

Disadvantages of peer to peer lending

Check the interest rates and fees – they might be higher than the banks, but they can also be very competitive for strong businesses. It’s best to compare your options before choosing.

They’re new – because this is a new type of finance, some platforms haven’t been without their problems, both technological and regulatory. As mentioned, do your research on the best platforms to go with.

No relationship building – as peer to peer lending is done online, you don’t get the benefit of working face-to-face with advisers in a bank. This might suit some businesses, but others might require a more personal touch.

Have you considered peer to peer lending to finance your business? Let us know in the comments below.

Photograph 1: Artem Varnitsin/

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Sam Bromley

Written by

Sam Bromley

Sam has more than 10 years of experience in writing for financial services. He specialises in illuminating complicated topics, from IR35 to ISAs, and identifying emerging trends that audiences want to know about. Sam spent five years at Simply Business, where he was Senior Copywriter.

We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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