Peer to Peer Lending UK: How Does it Work?

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An entry level guide to P2P business lending. Who does it, how it works, who benefits.

What is P2P?
Peer to Peer, or P2P as it is frequently abbreviated to, is the process of connecting two parties using technology platforms. Uber is a P2P platform, Airbnb is P2P, it’s an ancient idea, a community sharing resources, brought into the digital age. It’s Person to Person.

What is P2P Consumer Lending?
P2P Lending platforms connect Lenders with Borrowers. There’s a lot of these companies, thousands in China, dozens in the UK, they’re in the emergent ‘Fintech’ sector. Some connect individuals to individuals, sometimes these are called ‘Consumer P2P’ and enable people to borrow money for holidays, cars, weddings, or other personal reasons. It’s often quicker and easier than getting a bank loan, and the interest rates can be lower, typically around 9%, a lot better than a credit card.

What is P2P Business Lending?
Other P2P platforms connect Lenders with Business Borrowers. This means small businesses can borrow from individuals. This sector has flourished because small businesses frequently find it difficult to borrow from banks.

How does it work for Borrowers?
For the borrowing company it works like this: They research and choose a suitable lending platform, such as rebuildingsociety.com. Borrowing SME’s complete the online form to apply. Their application is then considered by the P2P company, and an appropriate interest rate is set. They may be asked additional questions by the platform and each borrowing request is considered individually on merit. SMEs can typically borrow anything from £25,000 upwards in this way. Reasons for borrowing could be expansion to new premises, purchasing stock for a big order, or covering expenses during a quiet period. The directors may well have to provide a personal guarantee against the loan.

Information supplied by borrowers typically includes:
Statutory Accounts
Management Accounts
Statement of Assets
Additional security details

P2P platforms frequently use external sources such as credit agencies to provide additional information including:
Business Trading History
Business Payment history
Adverse information (CCJs, winding up petitions etc.)
Verification of accounts supplied
Directors associated businesses
Directors Consumer scores
Adverse Media

Once accepted they are listed on the platform. This way, a small business can borrow in a relatively quick and easy way. Typically a borrowing business could expect to pay interest in the region of around 14%, depending on the interest rate set according to the platform.

How does it work for lenders?
Lenders can open an account on the P2P platform and deposit funds. They can then use those funds to lend to the listed companies. They can read the company profiles, do their own due diligence, and communicate with the companies and ask them questions if they want to. When they feel confident in the potential risk and reward they can contribute all or some of the asked for amount. The P2P platform holds the lender deposits until the loan is fully funded. When the loan is fully funded, the funds are transferred to the borrowing business, assuming they wish to proceed. They receive loan repayments and interest, which may be around 10%.

How does it work for the platforms?
Different platforms charge in different ways. Some charge a fee based on a percentage of the loan, payable in one go from the loan received. Others may charge a one off fee, or a combination of fees. Each platform is able to set their own fees according to the market, and according the rules and regulations in the country they operate in.

So there you have it. P2P lending in a nutshell. A technologically enabled way to connect lenders and borrowers.

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