Peer-to-peer lending (P2P) is a type of business loan where a large number of private investors lend to a business, usually through an online platform. The idea is that both the lenders and the borrowers get a better rate than they would through the banks.
Peer-to-peer lending is a bit different to standard business loans, for a few reasons. Using P2P means that you’re borrowing from a collection of individuals, and the peer-to-peer lending company facilitates the arrangement. You’ll still apply for the loan directly with the P2P provider; but technically you won’t actually borrow the money from them.
How does peer-to-peer lending work?
From the borrower’s perspective, approaching a peer-to-peer lending platform for a loan is much like applying with any other business lender. They’ll ask about your turnover, profits and trading history, they’ll want to see your bank statements and filed accounts, and they’ll ask about your plans for the money.
Once you’ve passed their initial criteria, your loan will be opened to the platform of investors, who then offer smaller amounts that collectively add up to the sum you want to borrow. Different P2P platforms handle this stage differently, with some using an auction-style format to ‘bid’ an interest rate, while others set the rates and simply wait for investors to choose particular loans that they want to invest in.
If all goes well, you’ll reach 100% of your target amount and get the funds shortly after.