Peer to peer business finance (sometimes abbreviated to “P2P”) is a way a business can borrow money when it needs it.
Here is a quick overview of the basics.
Traditionally, business borrowing usually related to some form of bank loan or another.
Very often it involved trying to exploit existing business relationships with a bank or even individual “bank manager” to secure the loan.
This process still exists as an option but since the late 20th century things have changed:
- the lending market has become increasingly diversified, with many new options and potential lenders (such as L3 Funding, for example) offering their services. Some of these changes have been developed out of the technological changes arriving with the internet;
- the financial traumas of 2008-2012 may have led some banks to become more risk-averse in terms of business lending.
P2P business finance is one of those relatively new options.
How it works
In outline, it’s an essentially straightforward process. Typically:
- a business approaches a provider of P2P platform services;
- their funding requirements are assessed. If they meet specified criteria, the funding proposal will be put online for investors to consider;
- investors will consider the proposition and decide whether to put their funds towards the total business finance funds required;
- you’ll repay them on an agreed monthly amount basis over the term of the loan;
- the process can be completed relatively quickly.
Why P2P lending exists
There are several advantages and disadvantages of P2P lending that are easy to understand for investors. Some of these claimed benefits are:
- speed – the sluggishness of some bank lending responses is sometimes cited as justification for the claim that P2P is a faster route to funding;
- entrepreneurial inclinations of investors – it is suggested that P2P funders are more likely to invest in riskier propositions than the banks;
- reduced costs – as the banks have been eliminated and investors are notionally speaking directly to borrowers, the costs of funding are suggested by some to be lower;
- more flexibility of terms and repayments – due to the fact that banks and some other lenders might apply “one size fits all” policies and conditions.
It is important to note though:
- general claimed advantages and benefits in the world of business finance need to be examined in terms of hard facts and figures to be sure that the cost of borrowing really is advantageous. This applies to any borrowing facility – including P2P;
- there will typically be charges involved levied by the platform providers. They might typically be 2-5% of the sum borrowed. That needs to be factored into your overall cost comparisons against other forms of business borrowing.
There are several potential P2P platforms and approaches, so what follows is inevitably something of a generalisation. Even so, you may typically need:
- a minimum of 2 years’ worth of visible public accounts;
- to have a legal status as a sole trader, limited company (Ltd), or Limited Liability Partnership (LLP)
- an annual turnover exceeding 100,000.
Note that the platform providers may, in some cases, refuse to forward your proposal for public consideration if, in their option, it lacks viability in business terms or has been poorly prepared.
P2P funding is one of many different forms of business finance.
Although it attracts generally favourable publicity, it does have some issues as well as advantages. As such, it needs to be considered critically, just as should any other option for obtaining business finance.