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How Peer To Peer Lending Works For Small Business

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How Peer To Peer Lending Works For Small Business

Peer to peer lending is an excellent alternative source of finance for startups and small businesses. If you are in need of funds for your business, instead of going to banks or high street lenders, you can now go to p2p platforms that match you with individuals willing to lend you money. P2p lending has become popular in the UK over the past few years. You may also hear about p2p lending but do not know how it exactly works and how it can help your business to grow. Here in this article, we will explain how you can get peer to peer loans to expand your business or fulfil your business requirements. 

What Is P2p Lending In The UK?

P2p lending is also called an innovative finance option because it is a relatively new lending form that is different from traditional lending methods. It eliminates the need for a middle man like banks or any other financial institution. In addition, it offers benefits for borrowers and investors. Businesses can get quick access to funds at a lower rate, while investors can earn attractive returns than bank loans. 

All the peer to peer lending platforms works like a marketplace. They operate online, and you can make an online application from anywhere. P2p platforms assess your loan application, and if it is approved, lenders will find you in the marketplace and lend you the required money. The interest rate highly depends on the credit score of the borrowers. The higher the credit score, the lower the interest rate. 

How does P2p Lending Work?

When you want to take out a business loan through a p2p platform, you have to make a loan application. And provide some necessary information such as your trading history, turnover, bank statements, profit, cash flow forecast and plans for the money. But the process of lending differs after the approval of your loan application. Instead of lending you money directly, the platform allows investors to lend money. Small investors pool their money until it collectively makes the amount you want to borrow. 

Some platforms set the interest rate themselves, while others offer a bidding system where bids on the interest rates that borrowers have to accept. You have to make repayments either in monthly instalments or as a lump sum amount at the end of loan terms. The interest rate you pay is distributed among the investors. You must also keep in mind that p2p platforms also charge fees from the borrowers and lenders to run their business. 

Advantages Of P2p Business Loans?

From recent studies, it’s found that most small businesses are rejected when they apply for a loan for the first time from a bank. It can cause demoralisation among startups and businesses wishing to expand, resulting in giving up at early stages. This is where p2p business loans come in. These are a perfect solution for those who find it challenging to get a loan from banks. 

Peer to peer business loans offer several advantages for businesses, some of which are as follows: 

  • You can get quick loans, and funds are transferred usually within weeks.
  • You do not need to pass through hard credit checks and lengthy paperwork like bank loans. 
  • P2p business loans offer flexible terms ranging from 3 months to 5 years. 
  • P2p platforms also offer unsecured business loans, which means you do not need to put your assets at risk of repossession.  
  • These loans come from established lenders, and you can get lower interest rates compared to traditional business loans. 

P2p platforms allow lenders to start investment from small amounts, and they also choose the borrowers according to their risk tolerance. We can say that p2p lending is equally beneficial for borrowers and investors.  

Disadvantages Of P2p Business Loans

Like all other financial products, along with advantages, p2p business loans also have some drawbacks.  

  • Peer to peer lending is a new type of finance, so some p2p platforms have regulatory and technological problems. You can reduce the risk by doing research and finding a platform following the best lending practices. 
  • You may find that the p2p platforms offer high-interest rates. Other than that, platforms also charge several fees that up to your borrowing cost and make it expensive.
  • All the peer to peer lending platforms operate online, so you will not get the benefit of working with advisers to face to face like in banks. It might be suitable for some lenders, but others require a more personal touch. 

You can reduce these risks by taking appropriate measures such as you can shop around and making price comparisons to find a well-reputed and experienced platform. Moreover, you must check the fees that platforms are charging so that you can decide whether you can afford to take a loan or not. 

Is P2p Business Loan Suitable For Small Businesses?

It is not easy to answer this question because it depends on individual circumstances whether to borrow through p2p loans or not. But it is essential to investigate and weigh up p2p business loans against the traditional financing options. The good news is that high street lenders have also been starting lending money to small businesses. But if you find it challenging to secure a loan from banks, you can turn towards p2p platforms. It can be a good idea to get funds through peer to peer lending platforms and fulfil your business needs. Now with the regulations of the Financial Conduct Authority, p2p platforms have become more transparent and organised. That is why p2p business loans are an option worth considering, especially for small businesses. 
We hope that this guide to peer to peer business loans helps you in understanding how peer to peer lending UK can be helpful for small businesses and startups. You can choose a platform of your choice and also take a loan for a period that suits your business needs. It helps you to get funds within a short time without passing through lengthy paperwork. You can use it to resolve business cash flow problems or expand your business. However, you should do your research and check if you can afford to take out this loan or not to avoid any inconvenience later.       

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