Peer-to-Peer Business Lending: Advantages and Disadvantages
Peer-to-peer lending can provide businesses with another route to funding outside traditional high-street banks. However, understanding which lenders, platforms and funding structures are appropriate can be more complicated than simply submitting an application.
This is where a commercial finance broker can help bridge the gap. At Revia, we work with businesses to understand their funding requirements, assess the available options and connect them with appropriate lenders from across our network.
Peer-to-peer lending may form part of those options, but it won’t always be the most suitable solution. Depending on the business, requirement and financial position, another form of business finance may provide a more appropriate structure.
In this guide, we look at how peer-to-peer business lending works, its potential advantages and disadvantages, and where it can fit within the wider commercial finance market.
How Does Peer-to-Peer Business Lending Work?
Peer-to-peer lending, commonly referred to as P2P lending, was developed as an alternative way of connecting businesses seeking finance with investors prepared to provide capital.
Rather than relying solely on a traditional bank, businesses can apply for finance through specialist platforms. The provider will typically assess the company, its financial performance, trading history, credit profile and the purpose of the funding before determining whether finance can be offered.
The structure, eligibility requirements, funding amounts and pricing can vary considerably between providers.
The P2P market has also evolved significantly. Some providers now use institutional funding or operate broader alternative lending models rather than relying exclusively on individual investors.
For businesses, the important question is therefore less about whether a facility carries the P2P label and more about whether the funding structure is appropriate for the requirement.
What Are the Advantages of Peer-to-Peer Business Lending?
P2P and alternative lending can provide businesses with additional options beyond conventional bank finance.
Access to a Wider Funding Market
One of the main advantages is simply having another potential source of capital.
A business may have an established relationship with its bank, but that does not necessarily mean the bank will offer the most appropriate facility for every funding requirement.
Looking beyond a single provider can open the door to lenders with different credit appetites, criteria and approaches to business funding.
Potentially Faster Decisions
Many alternative lenders have developed streamlined, technology-led application and underwriting processes.
For relatively straightforward applications, this can potentially result in quicker initial decisions and faster access to funding.
This can be particularly useful when a business is dealing with a time-sensitive opportunity, unexpected working capital requirement or purchase that cannot wait for a lengthy traditional lending process.
Different Lending Criteria
Commercial lenders do not all assess businesses in the same way.
Turnover, profitability, trading history, sector, credit profile and the intended use of funds can all influence a lender’s appetite.
A business that falls outside one lender’s criteria may therefore still have viable funding options elsewhere in the market.
This is one of the reasons taking a broader approach to business finance can be valuable.
Flexible Funding Purposes
Depending on the lender and facility, funding may be available for a broad range of commercial purposes.
Businesses may seek capital to purchase stock, invest in equipment, recruit additional employees, support expansion, manage working capital or take advantage of a commercial opportunity.
The key is matching the funding structure to what the business is actually trying to achieve.
What Are the Disadvantages of Peer-to-Peer Business Lending?
While P2P and alternative lending can provide additional routes to finance, they will not be appropriate for every business or every requirement.
Pricing Can Differ Significantly
The cost of borrowing can vary considerably between lenders.
Pricing will typically reflect factors such as the financial strength of the business, credit profile, facility size, term and perceived risk.
Businesses should therefore consider the complete cost of a facility rather than focusing solely on the headline interest rate.
Arrangement fees and other charges may also apply.
Personal Guarantees May Be Required
Depending on the lender and structure, directors may be asked to provide a personal guarantee.
A personal guarantee can create personal liability if the business is unable to meet its obligations under the facility.
Directors should therefore understand the terms and implications of any guarantee before entering into an agreement and consider obtaining independent legal advice where appropriate.
Funding Limits May Apply
Not every lender will be able to provide every level of funding.
The amount available may depend on turnover, profitability, trading history, existing borrowing and the overall financial position of the company.
Larger or more complex requirements may therefore be better suited to other areas of the commercial finance market.
P2P Lending Is Only One Funding Option
One of the most important considerations when looking for business finance is avoiding the assumption that a particular product is automatically the right solution.
A business looking for working capital might consider a term loan, revolving credit facility or invoice finance. A company purchasing machinery or vehicles may find asset finance more appropriate. Larger transactions, acquisitions or property requirements may require entirely different structures.
This is where looking across the wider lending market becomes particularly important.
The objective should be to understand the requirement first and then determine which type of finance is best positioned to meet it.
Bridging the Gap Between Businesses and Lenders
The commercial finance market includes banks, specialist lenders, alternative finance providers and institutions with different appetites for different types of transactions.
For business owners and directors, identifying which lenders are relevant — and how a funding requirement should be presented and structured — can be difficult without regularly operating within that market.
Revia helps bridge that gap.
We work with businesses to understand what the funding is for, the amount required, the financial position of the company and the wider objectives behind the transaction.
From there, we can consider appropriate funding structures and identify potential lenders from across our network.
That means a business approaching Revia about peer-to-peer lending may ultimately find that P2P is appropriate, or that a different form of commercial finance provides a better fit.
Is Peer-to-Peer Lending Right for Your Business?
The answer depends on the individual business and funding requirement.
Before proceeding with any facility, businesses should consider the total cost of borrowing, repayment profile, term, security requirements, personal guarantees and the flexibility provided by the facility.
The structure should also make sense in the context of why the capital is being raised in the first place.
Rather than approaching a single funding product in isolation, exploring the wider market can provide a clearer understanding of the options available.
Explore Your Funding Options With Revia
Whether you’re considering peer-to-peer lending or simply looking for the right way to fund your next requirement, Revia can help you navigate the available options.
Our role is to bridge the gap between businesses seeking capital and lenders looking to fund appropriate opportunities.
By understanding the requirement first, we can help structure the opportunity, approach appropriate lenders and provide businesses with a clearer route through the commercial finance market.
