Peer-to-peer (P2P) lending is a way for businesses to borrow money from lenders as an alternative to a traditional loan from a bank. This loan form includes a platform that both borrowers and lenders can sign up on, helping the company with their financial needs whilst profiting the entity by lending the cash by interest. P2P lending is most suitable for those needing to take out a relatively small loan, offering competitive interest rates and not focusing too heavily on credit scores.
What is Peer-To-Peer Lending
Peer-to-peer lending, as mentioned above, is a type of loan that allows companies to borrow money from individuals on the P2P platform that are willing to lend them money. It is a more informal process than other loans. You can communicate with the lender and tell them how much money you will need, what you will use it for, and negotiate an appropriate interest rate and the deadline to pay back the loan. The process is simple, requiring no paperwork, and instead of an online form that contains all of the company details, borrowers can view the profile on the platform and decide whether they want to go ahead with the loan.
Usually, P2P lending is used for small loans, around £60,000. If you are looking for a more significant sum to borrow, you can connect with multiple lenders on the platform to loan partial sums of the more significant amount. Similarly, if a lender is unwilling to lend you the total amount you need to borrow, you can do the same thing.
How Does Peer-To-Peer Lending Work?
The P2P lending process is easy and accessible to all businesses, as long as your credit score is at least 600 (for most companies).
The first step is to register on a P2P platform and enter all of the details they ask for. Although the sign-up application varies with every company, the general questions asked are contact details so that you are reachable by lenders and financial details such as bank statements and revenue. Although having an excellent financial history and credit score helps secure lower interest rates and demonstrate your reliability, many platforms will still allow you to register.
However, it may be more challenging to find a feasible lender. You will also be asked what the loan is needed for or used on, such as general office maintenance, staff wages or purchasing a stock for the products sold. Subsequently, your profile will be ready, and lenders will be able to view these details. They can then decide whether they would want to assist you financially. Once you have found an investor, you can complete the lending process and receive the money, paying it back in instalments with interest and other arrangement fees.
What are the Advantages and Disadvantages
Like any loan, there are both advantages and disadvantages to P2P lending, and whether this solution will benefit your company is based on individual preference. All factors should be reviewed.
A key advantage of P2P lending is that there is an excellent variety of lenders, meaning that you can find a range of different interest rates and choose which is most appropriate for your business.
Even if you find one suitable lender, you can also receive offers from others and combine several loans to reach your goal. This way, a more excellent pool means a more chance of finding the ideal loan; if one lender rejects you based on risk, another will find your profile appealing. Another benefit of P2P lending is that registering is quick, and there are no rigid criteria that automatically reject your application and hinder your chances of financial aid.
On the other hand, there are some disadvantages associated with P2P loans. For example, every time you pay back your loan with interest, there is usually an additional fee for using the platform or administration. This varies with companies, so checking which extra payments you incur is essential, as they can range massively. In addition, the government does not secure P2P networks, indicating that if you are unable to pay your loan, the lenders will not be reimbursed. Nonetheless, this can also be seen as a benefit because there is no requirement for using your property or inventory as collateral.
Peer-To-Peer Lending – To Conclude
In conclusion, peer-to-peer lending is an alternate method of securing a loan, allowing you to choose from a network of lenders or encouraging them to come to you. It is ideal for businesses with a lower-than-average credit score or history to be granted a small loan, helping the business operate in a time of financial uncertainty.
Other useful links about loans:
Enterprise Finance Guarantees Loans
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