Peer-to-peer business lending: how it works in the UK

Peer to peer lending is borrowing from a group of investors through an online platform instead of from a bank. The FCA describes loan-based, or peer-to-peer, crowdfunding as lending to a borrower in return for repayments over time, usually with interest. The platform connects the two sides.

For a business, that means a loan with a repayment schedule. Investors, not the platform, supply the money, and each may lend a small slice of your total. You deal with the platform, which assesses your application, sets the terms and collects repayments.

The term overlaps with crowdfunding more widely. Our guide to crowdfunding for business covers the equity, reward and donation models, which work very differently from a loan.

A borrower applies to a platform, the platform assesses the business, and if the application is accepted the loan is offered to investors who fund it. Steps and timings differ between platforms, so read each one’s own guidance.

• Application: you give details of the business, what the money is for and how you will repay it.
• Assessment: the platform checks the application against its own criteria, which usually include credit and trading information.
• Funding: investors choose whether to lend. A loan that is not fully funded may not go ahead.
• Repayment: you repay the platform on the agreed schedule and it passes the money on to investors.

Everything is subject to status and the platform’s criteria. An application may involve a credit search, and a full application can leave a mark on your credit file, so ask what kind of search will be used before you apply.

Yes, the FCA regulates loan-based (peer-to-peer) crowdfunding platforms. The FCA’s consumer guidance lists it as regulated, alongside investment-based crowdfunding, and tells people to check the Firm Checker to confirm that a platform is authorised.

That is a different question from whether your particular loan is a regulated credit agreement. The FCA’s consumer credit perimeter covers business lending of £25,000 or less to sole traders and small partnerships, but not to limited companies. Business lending above £25,000 generally falls outside it. So a loan to a limited company is not a regulated consumer credit agreement, even though the platform itself is an FCA-authorised firm.

The main difference is where the money comes from and who sets the terms. A bank lends from its own balance sheet and decides alone; a peer-to-peer platform raises the loan from investors under its own lending criteria.

Neither is automatically cheaper or easier. Compare the total cost of repaying, not only the headline rate: our guide to APR explained shows why, and the post on how to compare business loan lenders sets out what to line up side by side.

Eligibility is set by each platform, so there is no single rule. Platforms may lend to limited companies, sole traders or partnerships, and they publish their own requirements on trading history, turnover and purpose.

Expect to be asked for the kind of information any lender needs:

• Company details and, for a limited company, your Companies House record
• Recent accounts or management figures, and bank statements
• What the money is for and how the business will repay it
• Details of directors, and possibly a personal guarantee or security

A lender may ask a director to stand behind the loan personally. Read personal guarantees for business loans before you agree to one, because it can put your own assets at risk if the business cannot repay.

The risks for a borrower are the same as for any loan: you must repay with interest, late or missed payments carry consequences, and you may have given security or a guarantee. Missing payments can damage your credit record.

• Check what happens if you miss a payment, including fees and default terms.
• Check whether there is a charge for repaying early.
• Check who holds any security and what it covers.
• Check what happens to your loan if the platform stops operating, and who would collect repayments.

Investors on these platforms are taking a risk, and the FCA says so plainly: loan-based and investment-based crowdfunding are high-risk investments, and investors have no access to the Financial Services Compensation Scheme (FSCS). They may lose some or all of what they put in.

That matters to a borrower because it shapes how platforms behave. They need to attract investors, so they assess borrowers carefully and may turn down applications that other lenders would consider. Capzy does not arrange investments and this post is not an invitation to invest; it is written for a business that is looking to borrow.

The alternatives depend on what the money is for, and most can be compared in one place through a broker. A loan from a conventional lender, asset finance for equipment and invoice finance for slow-paying customers are the common ones.

If your credit history is a concern, the post on business loans with bad credit explains what lenders look at. The directory of business lenders shows which kinds of provider cover which products.

Capzy is a credit broker, not a lender, and is paid by the lender. We do not run a peer-to-peer platform and do not arrange investments. We introduce businesses to lenders for loans, asset finance, invoice finance and similar products, and show what comes back so you can compare it.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria.