What is a peer-to-peer loan and how does it work?

Are you looking for an alternative to traditional business finance? If so then peer-to-peer (P2P) lending might be a great option. Instead of using a bank, you can cut out the middleman and raise cash directly from other businesses or private investors.

In this guide we explain how peer-to-peer lending works and the pros and cons of using it. We also answer common questions like “how do I get peer-to-peer lending and “do peer-to-peer loans affect credit score?”

Table of Contents

What is a peer-to-peer loan?

A peer-to-peer loan is where you borrow money directly from other businesses or members of the public, rather than using a bank or financial institution. It is usually set up by a peer-to-peer platform: they assess your loan application and match you with suitable lenders.

It’s slightly different to crowdfunding, which is where members of the public fund your business in exchange for equity.

Key features:

  • Use a peer-to-peer website or platform
  • May get better rates than lending from a traditional bank
  • Lenders may get better return than investing in cash
  • Different types of loan available including, term loan, asset financing and mezzanine debt
  • Often possible to roll up interest and repay it at the end of the loan period

How does peer-to-peer lending work?

Peer-to-peer lending works by pooling together money from investors using a P2P website or platform. Borrowers can then apply to this P2P website for a loan.

P2P websites specialise in different types of borrowers, some focusing on private customers, others lending to property investors or other businesses.

What is a peer-to-peer loan for?

A peer-to-peer loan can be used for many purposes including personal and business uses. Providers will ask how you plan to use the loan as part of their application process. Some peer-to-peer platforms specialise in certain types of peer-to-peer lending, for example only offering loans for property or land purchase.

Some typical uses for P2P loans include:

  • Property or land purchase
  • Development finance
  • Tenant buyout (buying property from your landlord)
  • Refurbishment costs or converting a property
  • Auction purchase
  • Asset finance
  • Funding working capital
  • Paying tax
  • Recruiting staff
  • Buying new equipment
  • Renewable energy projects
  • Refinancing existing debt
  • Farmers planning to diversify

You can also use peer-to-peer loan for personal costs including:

  • Divorce settlement
  • Paying tax liabilities
  • Buying a car
  • Paying for a wedding
  • Paying for home improvements
  • Raising money for charity
  • Paying for medical treatment

What are the pros and cons of a peer-to-peer loan?

Here are the main pros and cons of a peer-to-peer loan:


  • Suits unusual circumstances - traditional lenders have strict lending criteria and may not consider applications if you have a new business or are planning a big expansion.
  • Good value - interest rates can be lower than traditional finance.
  • Quick to arrange - some P2P platforms can offer a decision within days.
  • Option to roll up interest - some platforms allow you to roll up interest and pay it at the end of the loan period.
  • Fixed interest charge - you may be offered a fixed interest charge. This means you’re only charged interest on the original loan value rather than being charged compound interest on an increasing balance (the loan plus any added interest).
  • May consider deferring repayment - P2P platforms may be more flexible than a traditional financial institution and allow you to defer repayment at the end of your loan period. You need to speak to them ahead of time if you need an extension.
  • Don’t give up control - because you are taking out a loan you won’t need to offer shares in your business in exchange for finance.


  • Only larger loans - some P2P lending platforms only offer larger loans starting at £25,000.
  • Short-term loans - P2P platforms usually only offer loans of up to 2-5 years as investors don't want to tie up their money for a long period.
  • Security required - security is usually required for property and bridging loans. Some platforms will only consider securing a loan against a property that is not your home.
  • Limited options for security - some platforms will only consider property as security.
  • Large deposit required - most P2P platforms ask for a deposit of around 30% on property purchases. 100% loans may be available if you can offer other assets for security.
  • Affects credit record - a loan default will affect your credit record, making it more difficult to get future finance.

What other finance options are available?

There are several other finance options available if you don’t want to use traditional business finance. They include the following:

  • Angel investor - a high net worth individual that invests in startup companies, often in exchange for equity. This can work well as you will gain a highly motivated and knowledgeable business partner.
  • Crowdfunding - works like peer-to-peer lending by raising cash directly from individual investors. However you will usually need to offer equity to investors.
  • Company equity - some business owners decide to sell shares in their company in exchange for a cash investment. This has the advantage that you won’t owe interest payments on the finance.
  • Commercial mortgage - if you own property it may be possible to arrange a commercial mortgage rather than using peer-to-peer lending. You may be offered a lower interest rate and longer repayment terms than a peer-to-peer loan.

How do I get a peer-to-peer loan?

The application process for a peer-to-peer loan varies depending on the website and the type of lending. A typical application process is as follows:

  • Fill in an online form with details about yourself and your business and information about the use of the loan.
  • Submit financial records of your business including bank statements and a business plan.
  • Speak to the peer-to-peer platform to discuss your application in more detail. Most providers will ask about other commitments and carry out an affordability assessment.
  • Arrange a survey to value your property or other assets used for security. Many providers prefer to use their own assessors.
  • Receive provisional offer from the peer-to-peer platform.
  • Website offers members of the public the opportunity to crowdfund your loan.

Where to get a peer-to-peer loan

Here are some providers of peer-to-peer loans:

LenderType of loanLoan periodLoan amountTypical ratesOther info
Blended NetworkRefurb, Development bridging loansVaries£250,000 to £6,000,000VariesOnly Ltd companies and LLPs
Crowd PropertyProperty loansVaries£100,000 to £5,000,000Starting at 7.44%
Folk2FolkMany different types6 months - 5 yearsStarting at £100,0006.5% paMust own property apart from home
Funding OptionsMany different typesVariesVaries6.03%This is a P2P broker rather than platform
KuflinkAll business purposesVaries£50,000 to £750,000VariesPersonal guarantee required
Lending WorksPersonal loansUp to 5 yearsUp to £25,00012.90%Specialise in personal loans
SomoBridging loanUp to 2 yearsMaximum 70& LTV5.88%

Frequently asked questions

Peer-to-peer loans can be risky for members of the public lending money. That’s because there’s a risk that the borrower defaults on the loan and the money isn’t recovered. Most peer-to-peer lending platforms therefore perform strict credit checks and affordability checks on borrowers.

Since 1 April 2014, peer-to-peer lending platforms have been regulated by the Financial Conduct Authority (FCA). This means you’ll be able to complain to the financial ombudsman if things go wrong.

Peer-to-peer lending works like a loan where you pay the lenders interest, or roll up interest and pay them at the end of the loan period.

Crowdfunding usually means giving up equity in exchange for funding.

Peer to peer loans will affect your credit score like other types of business loans. Some lending platforms offer soft credit checks as part of their application process. This won’t show up on your credit report.

If you default on a peer-to-peer loan then this is likely to show up on your credit report and may affect your ability to get future finance.

Peer-to-peer loans vary in cost, depending on the lender’s criteria and your circumstances. Many providers charge arrangement fees, legal fees and a valuation fee for any assets used for security. Some providers also charge annual fees and early exit fees, depending on the terms of your agreement.

Interest rates are often lower than a traditional business loan and currently start at around 5%.

How much you can borrow depends on how you plan to use the loan and the value of your assets.

Most providers require a deposit of at least 30% on property purchases and up to 45% deposit on a land purchase. You may be able to find a 100% loan if you have other assets to offer for security.

Yes, you may be able to get a peer-to-peer loan with bad credit. In fact, many borrowers first consider peer-to-peer lending because they’ve been turned down for traditional finance.

You may be able to repay a peer-to-peer loan using non-traditional repayment methods. Acceptable repayment methods include:

  • Sale of a property
  • Pension
  • Business profits
  • Divorce settlement
  • Tax rebate
  • Sale of investments or other assets
  • Take out new finance

Since 1 April 2014, lending offered on peer-to-peer lending platforms has been covered by the financial ombudsman. That means you can complain to the financial ombudsman if things go wrong.

However, peer-to-peer loans are not covered by the financial services compensation scheme. This leaves lenders potentially out of pocket if you go out of business and can’t afford to repay the loan.