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Peer-to-peer lending guide

Peer-to-peer (P2P) lending is a fast-growing type of finance in the UK. Here’s a handy guide if you’re wondering about using P2P to finance your business.

What is P2P lending?

P2P lending is a form of financing that allows investors to lend money to businesses needing funds. This process occurs through online platforms that match lenders with borrowers.

How P2P lending works

The P2P lending process typically works as follows:

  • A business applies for a loan, either directly or through a broker such as ASC, via a peer-to-peer lending platform. The applicant supplies information about the company, its financial history, and the purpose of the loan.
  • The lending platform evaluates the application based on creditworthiness, income, and other factors and assigns the business a risk rating.
  • The approved loan application is listed on the platform for lenders to review.
  • Lenders choose which loans to fund, often spreading their investment across multiple loans to diversify risk.
  • Once enough investors have committed to funding the loan, the loan is paid out to the business.
  • The business makes regular loan repayments to the lending platform, which are distributed back to the lenders.

Benefits of P2P lending

  • P2P lending can offer several benefits to businesses, including the following:
  • P2P loans can offer lower interest rates than traditional loans from banks or building societies.
  • P2P offers easier access for those who might not qualify for traditional loans.
  • P2P loans can be much quicker to process than through the traditional channels.
  • Some P2P platforms have no minimum loan amount, so they might be suitable for small loans over a short period.

Why use a broker for P2P lending?

A good broker should recognise when a proposition is not suitable for a bank or other mainstream lender. For example, the business might not be mature enough to demonstrate viability over a two or three- year trading period, or it could be a previously loss-making business that has a viable turnaround plan.

In P2P lending, the main challenge is demonstrating to the investors why a proposal is suitably robust so that they can confidently take money out of a safe bank deposit account or other savings scheme paying 3 or 4% per annum and lend it to a business paying double that or more.

At ASC, we know how to show P2P lenders the additional benefits a business proposal might bring to the local community (its pot of investors) such as creating employment or renovating dilapidated, eyesore properties, for example.

Recent ASC P2P completions:

  • Purchase of a village store and Post office by a Community Interest Company (CIC), protecting an invaluable service that would otherwise have been lost to the local community.
  • Refinance of a hotel after the mortgage had ended and the operators in their late 70s had no viable alternative. This P2P loan gave them up to five years to organise a retirement sale.
  • Working capital for a previously loss-making groundworks and civil engineering company under new management, with a demonstrable turnaround strategy.

P2P lending offers an innovative way for borrowers to access funds. However, as with all finance, it comes with risks and requires careful consideration and management. Depending on your circumstances and requirements, peer-to-peer commercial funding might not be the right solution for your business.

To find out more about your business finance options and whether P2P finance could be a viable option for yours, get in touch with your local ASC Director.

Peer to peer lending guide

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