Peer to peer lending

Peer-to-peer (P2P) lending connects you directly with individual investors. And with over 100 P2P platforms now operating in the UK and a market worth £342 million, it’s become a serious alternative to traditional lending.

But is peer-to-peer lending right for your business? In this guide, we’ll walk you through everything you need to know to make an informed decision.

Key points:

• Peer-to-peer lending allows businesses to secure finance from individual investors by using special online platforms

• This type of funding can often be secured more quickly and easily than traditional bank loans

• Funding Options by Tide can help when optimisation working capital isn’t enough, offering access to business finance up to £20 million

What is peer-to-peer lending and how does it work?

Peer-to-peer lending (often called P2P) is essentially crowdfunding for business loans. Instead of borrowing from a single bank, you borrow from multiple individual investors who each contribute smaller amounts that add up to your total loan amount.

An online P2P platform will act as a matchmaker between your business and its community of individual lenders. You submit an application explaining how much you need and what you’ll use the money for. The platform will then assess your application and, if approved, present your loan request to their investor pool.

Different platforms handle the funding stage differently:

• Some use an auction-style system where investors bid on interest rates, potentially driving down your borrowing costs.

• Others set fixed rates and simply wait for enough investors to fund your full amount.

Once your loan’s fully funded, you’ll receive the money and make regular repayments with interest. The P2P platform will handle all the admin, such as collecting your payments and distributing them to the individual investors.

For investors, they can potentially earn better returns than putting their money into traditional savings accounts or bonds. For borrowers, it’s an alternative when banks say no, often offering faster decisions and more flexible criteria.

Who should consider peer-to-peer lending?

P2P lending isn’t suitable for every business, but it can be a good option for certain types of companies to consider. Here’s who might benefit most:

• SMEs rejected from bank loans: Traditional bank lenders may turn you down if your business has limited trading history or a lower credit score. P2P platforms often have a more flexible criteria, although some may still require a minimum trading period or personal guarantees.

• Growing businesses needing quick funding: P2P can be ideal when you need to move fast on opportunities, with approval decisions often taking just 24-48 hours.

• Property and construction businesses: This sector accounts for the largest share of total P2P business lending in the UK, as platforms offer alternatives to traditional bridging loans and property development finance.

• Businesses with limited assets: You may not need to put up valuable assets as collateral since most P2P loans are unsecured.

• Companies seeking transparency: P2P platforms often offer clearer terms and more straightforward pricing than traditional lenders. But fees and interest rates can vary, so always review the terms carefully.

What are the benefits of peer-to-peer lending?

P2P lending has grown rapidly because it addresses many of the frustrations businesses face with traditional banking. Here are the main advantages:

• Faster approval speed: Most P2P platforms can make lending decisions within days – sometimes even offering same-day indicative approvals and funding within 48-72 hours after documentation – compared to the weeks or months traditional banks can take

• Higher approval rates: P2P platforms typically have more flexible lending criteria than banks, helping businesses that might struggle to secure traditional finance, especially those with lower credit scores or limited trading history

• No equity dilution: Unlike equity crowdfunding, P2P lending is a form of debt finance, so you keep full ownership of your business

• Competitive rates for strong businesses: Businesses with strong financials may secure more competitive rates, sometimes starting around 3-5%, though many P2P loans range from 6-12% or higher depending on risk

• Transparent process: Most P2P platforms provide clear information about fees, rates, and terms upfront, making the process more transparent than some traditional lenders

• Access to larger amounts: Some platforms can provide loans up to £2 million, making them suitable for major business investments

What are the risks and downsides?

Like any form of business finance, peer-to-peer lending comes with potential drawbacks you’ll need to consider:

• Higher interest rates for weaker businesses: If your credit score or trading history isn’t very strong, P2P interest rates can reach 15-20% or more – much higher than typical bank loans

• Potential for variable rates: Some platforms offer variable-rate loans, which could increase over time and hinder your cashflow

• Early repayment charges: Many P2P platforms don’t charge early repayment fees but some do, so always check the terms of your loan agreement before signing

• Personal guarantees usually required: Most P2P business loans require directors to provide personal guarantees, which puts your personal assets at risk if the business can’t meet its repayments

• Platform risk: If the P2P platform fails, managing or recovering your loan could become complicated – your money won’t be protected like it would be in a bank – although FCA regulation has improved protections

• Limited regulatory protection: P2P loans aren’t covered by the Financial Services Compensation Scheme (FSCS), so you could lose money if the platform goes out of business

How much does peer-to-peer lending cost?

The cost of using P2P lending will vary significantly based on your business profile and the platform you choose. But interest rates will typically range from 3% to over 20%, with most businesses falling somewhere in the middle.

If your business has a good credit rating, solid trading history, and healthy cash flow, you’ll have a better chance of securing rates at the lower end of this range. Newer businesses, or those with weaker financials, will likely face higher interest rates to reflect the increased risk to investors.

Beyond interest rates, you'll also need to consider platform fees. Most P2P lenders charge an arrangement fee of 1-5% of the loan amount. And some platforms also take a percentage of each monthly repayment, typically around 0.5-1%.

For example… If you took out a £50,000 loan over three years at 8% interest with a 2% arrangement fee, you’d pay £1,000 upfront plus around £1,560 per month. The total cost would be roughly £57,160 compared to the initial £50,000 borrowed.

It's worth comparing P2P to alternatives if you’re able to:

• Traditional bank loans might offer lower interest rates (3-7%) but often require some form of security and have a stricter approval criteria

• Invoice finance could cost as little as 1-3% per month but will only work if you have invoices outstanding

• Asset finance is another option that could offer rates of around 4-10%, but you’ll need to be buying specific equipment to make use of it

What do peer-to-peer platforms look for in applications?

P2P platforms evaluate applications differently from traditional banks, but they still need to assess risk for their investors. Here’s what most platforms will look at:

• Trading history: Most platforms want to see at least 12-24 months of trading, although some will consider newer businesses that have strong and detailed business plans

• Monthly turnover: The minimum turnover requirements vary, but many P2P platforms will want to see regular monthly turnover of £10,000-£20,000 or more

• Credit score: Both your personal and business credit scores matter, but P2P platforms are often more flexible than banks about lower scores

• Cash flow consistency: P2P platforms want to see you can make the monthly repayments reliably, so demonstrating regular income is very important

• Sector suitability: Some P2P platforms specialise in certain industries, like property and construction, so you’ll need to look for one that’s suitable for your business

• Use of funds: You’ll need to explain clearly how you’ll use the money – borrowing to fuel business growth or working capital are usually most favourable

How do I choose the right peer-to-peer platform?

With over 100 P2P platforms operating in the UK, you’ll need to research carefully to find the right one for your business. To start, checking that any platform you’re considering is authorised and regulated by the Financial Conduct Authority. You can search for them on the Financial Services Register.

Consider the platform's track record and specialisation. Do they focus on businesses operating in your sector? Or do they cater to more general business lending? Platforms that understand your industry are more likely to approve your application and offer competitive terms, but you don’t necessarily need to use a specialist site.

You’ll also want to compare the total cost of borrowing – not just the headline interest rate! So take arrangement fees, monthly charges, and any early repayment penalties into account. For example, a platform offering 6% interest with a 5% arrangement fee might be more expensive than one charging 8% with no fees.

Look at the funding model too. Auction-style platforms – that allow investors to bid on the interest rate they’re willing to offer – might offer lower rates, but fixed-rate platforms will provide more certainty. So consider which approach suits your timeline and risk tolerance.

Finally, review the platform’s track record, particularly during economic downturns. Newer platforms may not have been tested during recessions, which could affect the activity of their investor base and your ability to refinance if needed.

What’s the application process like?

The peer-to-peer application process is usually simpler than applying for a bank loan, but you’ll still need to provide a lot of information. Here’s what to expect:

1. Initial application: Most P2P platforms start with an online form asking for your basic business details, loan amount, and reason for the loan

2. Document submission: You’ll need to provide business accounts, bank statements (usually 3-6 months), and identification documents

3. Credit checks: The P2P platform will assess both your personal and business credit history as part of their risk evaluation

4. Business review: Many platforms will conduct a phone interview to better understand your business and loan requirements

5. Investor funding period: Once your application has been approved, your loan will be presented to investors – this can take anywhere from a few days to several weeks, depending on the platform

6. Funds transfer: If your loan is successfully funded, the money will typically arrive in your designated bank account within 24-48 hours

How does peer-to-peer lending compare to alternatives?

Understanding how P2P stacks up against other financing options can help you make the right choice for your business:

• Traditional bank loans: P2P typically offers faster approval and more flexible criteria but often at higher interest rates and with less regulatory protection

• Asset finance: P2P doesn’t require you to purchase specific assets and offers more flexibility, but asset finance often provides lower rates for equipment purchases

• Invoice finance: P2P provides a lump sum that you can use for any reason, while invoice finance only advances money against outstanding invoices but often at lower monthly costs

• Equity crowdfunding: P2P lets you keep full ownership of your business, but equity crowdfunding doesn’t require repayments or personal guarantees

• Overdrafts: P2P provides larger amounts for longer periods but at higher costs than overdrafts, which are generally better suited for short-term cash flow management

What are the regulatory protections?

P2P lending regulation has strengthened significantly since 2019, when the Financial Conduct Authority introduced tougher rules following some high-profile platform failures.

All legitimate P2P platforms must be authorised and regulated by the FCA. This means they must separate client money, maintain adequate capital, and follow strict operational requirements. The platforms must also provide clear information about risks and have wind-down plans if they fail.

However, P2P loans aren’t covered by the Financial Services Compensation Scheme that protects bank deposits up to £85,000. So if a P2P platform fails, you might still owe money even if the platform can’t collect your repayments.

Many reputable platforms are also members of the 36H Group (named after Article 36H of the Financial Services and Markets Act 2000), which sets additional standards for consumer protection and industry best practices.

The main regulatory protection for borrowers is that platforms have to clearly explain all the risks, fees, and terms before you sign an agreement. They’re also required to assess affordability to make sure you can realistically make the repayments.

What happens if things go wrong?

If your business is struggling to make the repayments, contact your P2P platform as soon as possible. Many platforms offer some flexibility, such as payment holidays or restructuring arrangements, especially if you communicate early.

Missing payments will likely result in late fees and damage to your credit score. The platform will typically try to work with you initially, but if you continue to miss payments they could employ a debt collection agency or take legal action.

Because most P2P loans require personal guarantees, your personal assets could also be at risk if your business defaults. That could include your home, car, or other valuable possessions, depending on the guarantee terms.

If the P2P platform itself fails while you have an outstanding loan, you’ll typically still need to continue making repayments since the FCA requires platforms to have arrangements in place to continue collecting loans – often through a backup servicer.

Find business finance with Funding Options by Tide

Whether you’re looking for a standard business loan, a short-term business loan, or something a little more specialist, like auction finance for property developers, we’re one of the leading names in business finance in the UK, having helped facilitate over £800 million in finance to more than 18,000 customers. 

Checking if you’re eligible is free, only takes a few minutes, and while a full application would impact your personal or business credit score, checking eligibility won’t. Just submit your details via the link below to find out if you could be eligible to borrow up to £20 million.

Find business finance.

FAQs

Can I get peer-to-peer lending with bad credit?

Possibly. Many P2P platforms are more flexible than traditional banks when it comes to credit scores. But you’ll likely face higher interest rates, and you might need to provide extra documentation or guarantees. Some P2P platforms specialise in lending to businesses with imperfect credit histories.

How quickly can I get funding through peer-to-peer lending?

Most P2P platforms can make approval decisions within 24-48 hours, with funds typically arriving within a week if your loan is successfully funded by investors.

What if I can't make a repayment?

Contact your P2P platform immediately if you’re struggling. Many offer payment holidays or restructuring options if you communicate early. Missing payments could result in hefty fees and damage to your business credit score, and persistent defaults could lead to legal action or asset recovery under your personal guarantee.

Is peer-to-peer lending safe for borrowers?

P2P lending is regulated by the FCA and generally safe for borrowers who understand the terms. But it’s not covered by the Financial Services Compensation Scheme like bank deposits are. The main risks are higher interest rates and personal guarantee requirements rather than platform safety.

What’s the difference between P2P lending and crowdfunding?

P2P lending involves loans that you repay with interest, while crowdfunding typically involves either donations or selling equity in your business. With P2P, you keep full ownership but need to make regular repayments. With equity crowdfunding, you don’t repay but give up a stake in your company.

Can I pay off my peer-to-peer loan early?

Most P2P platforms allow early repayment, and many won’t charge you a fee. But some do impose early repayment charges, so check the terms before signing.

Do I need trading history for P2P lending?

Most platforms prefer businesses with at least 12-24 months of trading history, but some will consider newer businesses with strong business plans or where directors have good personal credit.

What documents do I need for a P2P application?

Typically, you’ll need to provide business accounts, bank statements (3-6 months), proof of identity, and a clear explanation of how you intend to use the funds. Some platforms may also request business plans, customer contracts, or other supporting documentation depending on your circumstances.

How do I know if a P2P platform is legitimate?

Check that the platform is authorised and regulated by the Financial Conduct Authority using their online register. Look for membership of the 36H Group and read reviews from other borrowers. Avoid platforms that make unrealistic promises or don’t clearly explain their fees and risks.

What happens if the P2P platform goes out of business?

You’ll typically still need to continue making loan repayments. FCA rules require platforms to have arrangements in place to continue servicing loans, often through backup companies. But this could cause administrative complications and you might temporarily lose access to any account management features.