Peer-to-peer business loans

Key takeaways

• P2P lending allows individuals to directly lend money to businesses through online platforms, avoiding traditional banks and offering potentially better rates and faster funding.

• Businesses benefit from competitive interest rates and quick access to funds, while lenders can earn higher returns, choose their investments, and manage risk.

• Risks include potential defaults and lack of government protection. Investors should check platform fees and tax implications before investing.

What is peer-to-peer lending in a business context?

Peer-to-peer business lending, sometimes known as P2P lending, is a way for individual investors to lend money to businesses without the business needing to use a bank to secure funds.  

A peer-to-peer online lending platform connects investors with borrowers and helps provide the framework for lending and streamline the process.   

Like a regular loan, lenders earn interest from the borrowers. The length of the loans and frequency of repayments will depend on the individual platforms and its terms and conditions.  

Just as with traditional investing, there are risks with peer-to-peer lending, particularly if the business borrowing the money runs into financial difficulty.  

Some P2P platforms operate a provision fund to cover any bad debt. Others might secure loans on property the businesses own or are developing. 

What advantages does peer-to-peer offer borrowers?  

As the bank or building society is removed completely from the lending and borrowing process, the main advantage for businesses is that they can get a more competitive interest rate on their borrowing.   

The funds can also be paid a lot faster than if you went through a bank. The online application process only takes 30 minutes and businesses are typically paid within two weeks – sometimes in as little as three days.  

What are the advantages of lending money to a business?

There are several advantages of choosing peer-to-peer business lending over other types of investments or savings. These include:  

• Better returns. Investors who lend their money can often earn more attractive returns than if their cash was sitting in a low-paying savings account with a bank or building society.   

• Manage the level of risk. As an investor, you may be able to choose your rate of return based on the level of risk you’re prepared to take.  

• Flexibility. You can choose how much you wish to lend and you may be able to decide how long you want to lend for. You might also be able to set the notice period in case you need your funds back earlier.  

• Choose who to lend to. Depending on the platform, investors may also be able to decide which businesses they are prepared to lend to and hopefully help prosper. 

What are the risks of lending money to a business?

Peer-to-peer business lending is not risk-free for investors. Some of the considerations include:  

• Late payment. This is where the company borrowing the funds delays making a loan repayment, often for cashflow reasons 

• A business defaulting. This could arise if the borrower no longer has the means to pay off the loan, putting some or all of the investor’s capital at risk 

• Early repayment. If the borrower decides they no longer need the funds and wants to clear the debt quicker, the investor may not earn as much as they initially anticipated 

• Cost of recalling the loan. If the situation changes and you need the money back faster that you first thought, there may be a penalty charge to pay or the money may not be immediately available 

• No government protection. Unlike most savings accounts peer-to-peer lending is not protected by the Financial Services Compensation Scheme which guarantees the first £120,000 of your funds.  

How to get started with peer-to-peer lending  

If you have decided that peer-to-peer business lending is for you, it’s straightforward to get started.  

• Choose a P2P platform. Review peer-to-peer lending platforms for features such as who you’ll be lending to, when you will earn interest, whether you can withdraw money early and what facility there is to cover bad debt.  

• Check fees and charges. Fees and charges can substantially eat into your investment return, so review how the platform generates its own revenue and what this will mean for your investment.   

• Understand the risk. Try to gauge how much risk there is in your investment by researching the platform and the businesses you’ll be lending to. Also understand what provision is in place if the borrower is late or defaults on their repayments.  

• Decide how much you want to invest. After weighing up any risks involved, choose an amount to lend through the platform. Note any minimum or maximum restrictions.  

• Open an account and start lending. Register online and follow the step-by-step process to start investing. Each platform will have a slightly different way of investing. You may need information such as personal identification and proof of address to get started.  

Before you take the plunge with P2P business lending, it’s worth comparing the returns you can get with other types of savings and investments, such as:  

• Fixed term bonds 

• High-interest savings account  

• Stocks and shares ISAs  

If you’re undecided which route to take, find out more information with our guide to investing versus saving.  

What’s the difference between peer-to-peer lending and crowdfunding?  

Peer-to-peer business lending and crowdfunding are both alternative financing models, but operate differently.   

P2P lending generally involves individual investors directly providing loans to businesses through online platforms, with the focus on loan repayment with interest.  

In contrast, crowdfunding businesses seek funds from a collective of individuals in exchange for rewards or equity in the business rather than a fixed interest return.  

The level of financial risk involved can also differ. P2P lending is generally more predictable due to fixed loan terms and interest rates.   

Conversely, crowdfunding outcomes can vary because funds might be given without repayment expectations.  

Are there tax implications if I lend money to businesses?  

Yes, there can be tax implications when lending money to businesses in the UK, with the interest received from the loan taxed as income, which must be reported on your self-assessment tax return. 

Your Personal Savings Allowance (PSA) should be factored in too. The PSA allows basic-rate taxpayers to earn up to £1,000 in interest tax-free, while higher-rate taxpayers can earn up to £500.  

Keep in mind that tax regulations can change, and consult a tax advisor for the latest information on P2P lending and tax implications in the UK.