It can be challenging for entrepreneurs to get a small business loan approved by the bank. Often, it involves a lot of red tape, strict credit score criteria and a process that takes up a lot of time and energy.
If you’ve recently been rejected by the bank, a different type of lending might offer a more practical solution.
P2P platforms offer quick and accessible loans to small business owners. These loans can be used for capital funding, or as a cash injection to facilitate short-term expansion goals.
What is P2P Lending?
Peer to Peer lending platforms matches up viable borrowers with willing lenders (investors) across an online platform. P2P investors, who provide the funding for loan requests, are able to earn tax-free returns on their investment thanks to the UK government’s IF-ISA arrangement, available on a selection of platforms and products.*
How Does It Work?
All transactions take place online after the prospective borrower has completed an application process that is vetted by the host platform. Once a risk score and credit rating is attached to the application, interest rate options are made available.Â
An approved application is then made available to prospective investors. These lenders can submit the sum they are willing to loan, with the total amount being consolidated when the listing closes. Once this happens, the loan amount is transferred to the borrower. In some cases, loans are funded by the host platform and fulfilled by investment afterward.
P2P Loans vs Bank Loans
Getting a loan from a bank can take a very long time. Short-term P2P loans bridge that gap, allowing for small businesses to get up and running with a short turnaround time.
Peer to Peer providers are also typically more open to borrowers that a bank lender might not consider, albeit they do have stringent vetting processes in play.
Applying for P2P Lending
When applying for a P2P loan for your business, you’ll need to follow the following steps:
Submitting Your Financial Records
The financial records of the business will define your risk score and credit rating. If you’re a startup or a non-limited company, loan applications may be viable as a result of the business owners’ personal credit records, depending on the provider. Some providers will ask for at least two years of trading records.
Agreeing on Your Interest Rate
Risk scores and credit rating have a direct bearing on the interest rates offered on a P2P loan, along with other factors. The higher the level of risk that a lender is undertaking, the higher the interest rate is to be expected. Some P2P interest rates are variable, changing from month to month.
Secured vs Unsecured Loans
In most cases, Peer to Peer platforms offers unsecured loans. This means that prospective borrowers don’t need to offer up any security. Be mindful that unsecured loans typically have high-interest rates as they are less likely to be recovered by the provider (and investor) in case the borrower defaults.Â
From an investor’s perspective, Peer to Peer platform contributions can be unsecured. Some Peer to Peer companies provide loans that are secured by property to mitigate risk.
Receiving Quick Business Funding
Peer to Peer loans are quicker to process than traditional loans, which are typically subject to extensive due diligence on behalf of the bank or financial institution. When all parties are comfortable with the level of risk and return, the turnaround process to receive funding can be quick (subject to underwriting).
P2P Business Funding as an Alternative
Launching a successful startup requires diligence and patience. The latter can be tested when business funding applications get rejected.
Peer to Peer lending is an alternative to consider if this happens, especially as it provides easy access to finance, potential quicker turnaround times, and minimal red tape to achieve the desired result.**
As with any loan application, business owners should always do extensive due diligence. This includes understanding interest rates, familiarising themselves with the payment terms and accepting administrative fees as set out by the initial agreement.
*Capital is at risk. HMRC Rules Apply. No FSCS protection.
** Failure to meet the repayment criteria of a loan could result in the security being repossessed.
