P2P lending: what is it and should startups use it?

Traditional financing options for startups can be slow and risk averse. Here we give an overview of online funding options that cut out banks.

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Peer-to-peer or P2P lending allows startups to obtain loans directly from individual investors, cutting out financial institutions. It connects companies looking for funding with lenders who want to invest.

P2P lending sources increased following the 2008 financial crisis when traditional lenders introduced stricter lending criteria. 

Most P2P lending takes place through online platforms. The platform provides a place for lenders to decide who to lend to and loanees to pitch investment opportunities to potential investors.

P2P lending is sometimes called social lending or crowd funding. All UK P2P lenders are regulated by the Financial Conduct Authority (FCA).

How is it used and by who?

Zopa was the first UK P2P lender, set up in 2005. There are dozens of others, including Funding Circle, LendInvest and Kufflink. The P2P lending environment fluctuates as some lenders shut and others start operating. 

P2P lending platforms act as administrators between lenders and borrowers. Lenders can get a higher rate in return for taking on more risk, because P2P loans don’t qualify for savings guarantees. Borrowers can access funding if they have been rejected for loans from alternative sources or at a potentially lower rate than from traditional lenders.

If a startup’s loan application has been rejected, it does not necessarily mean they are risky to invest in. There are many reasons why traditional financial providers reject loan applications from new businesses. Also, reputable P2P lending platforms only accept lending requests from reliable sources.

Equity crowdfunding platforms like Crowdcube and Seedrs are not P2P lending platforms but can be a good option for startups looking for investment.

How does it work?

P2P lending platforms set rates and terms for lending and borrowing. They charge both lenders and borrowers fees, not commission. Investors open an account and deposit funds. The organisation wanting a loan is credit checked by the platform, its financial history is analysed to establish a credit rating and it is then assigned a risk category that dictates the interest rate offered to lenders. Their business and borrowing requirements are reviewed to set a funding target.

Lenders can select from higher or lower risk lending options. They can choose the loan term and the return they are after. The rate of return is potentially higher for riskier loans and lower for low-risk investments. Most lenders split investments over many loans. Diversification is always a good investment strategy and with P2P lending it reduces the risk if one loan is not repaid. 

Loan applicants review offers and select one or more loans from several, even dozens of investors. Funds transfers are handled by the platforms. Borrowers repay capital and interest to lenders through the platform. Borrowers set a funding target and the lending process ends when it is met. Not all borrowers meet their target.

What are the advantages?

P2P is a flexible, transparent lending alternative to traditional providers like high street banks.

  • Being online, once borrowers are verified and accepted, investment funds can be accessed quickly.
  • There are now many P2P lending options. The amount you can borrow ranges from small to large amounts and borrowers don’t have to put down collateral or pay a deposit.
  • The flexibility means you can borrow just what you need, making it cheaper, easier and quicker to repay. You can borrow for a wider variety of reasons. Platforms set their own criteria on what loans can be used for.
  • If you are deemed a good credit risk, the loan interest repayment rate could be lower than from other sources. If you have a poor credit score, P2P lending can provide a way to borrow.
  • Once the rate is decided there will be no fluctuation. Unlike stocks and shares and even base rate, it is fixed, which helps your startup’s financial planning and cash flow forecasting.
  • Another advantage is, unlike lending options for startups such as crowdfunding or VC loans, you retain full control of your business.

What are the risks?

  • A platform may not accept you as a borrower, and if they do, the interest rate charged could be high. Get through that hurdle and there is no guarantee you will find sufficient lenders to meet your borrowing target.
  • If you can’t meet the repayment schedule, you may not get the same protection as you would borrowing from a traditional lender. Your debt could be passed onto a debt collection agency, opening up the possibility of court action.
  • P2P lending platforms conduct credit checks which could impact your credit score, making other financial applications more difficult.

Overall, P2P lending is riskier than traditional lending because investors take on risk that banks normally cover.

When to consider using P2P lending?

There are lots of reasons a startup may quickly need funds, for an unexpected event, an opportunity to grow or for further investment. Sometimes, traditional lending vehicles can react slowly. Using P2P lending platforms can allow an opportunity to be grasped.

Ensure your startup’s finances and credit history are healthy before applying to a P2P platform. Factor loan repayments into your financial planning. You will be more likely to be accepted and to qualify for lower rates. Remember, platform investors want to invest in companies they think will be successful with a healthy EBITDA, who pose less risk and who are unlikely to default on loans. 

Delay applying until you are more likely to be accepted. Understand how the platform works and its eligibility criteria. Consider what questions the platform will ask, prepare answers and, ideally, wait until you have support from potential investors who understand and support your business.

P2P lending is potentially available for any startup with a basic trading history or owners who pass a credit check. There are few restrictions on annual turnover and the sector your business operates in.

What are the alternatives?

Apart from traditional lenders, other options include crowdfunding, which is similar to P2P lending in that investment usually comes from multiple investors. Sites like Crowdcube and Seedrs are set up to lend to startups. They will take a share of your business, so be prepared to dilute your ownership.

However, as in the case study below, if you opt for many small investors, pressure from individual investors will be less.

VCs are another investment option for startups. They also provide expertise and advice as well as funds but may want to have more influence and control over your business and investment terms can be onerous.

Accessing P2P lending?

There are dozens of P2P lending options in the UK and more if you include crowdfunding sites. Many focus on lending to startups and some specialise in specific sectors like property or green energy.

Not all providers are the same, so research the market, check the company structure and any financial information you can find for P2P lenders you consider using. Two small P2P providers, Lendy and Funding Secure went into administration in 2021 and 2019 respectively.

Make sure the company is registered with the FCA and check forums for views on the lender’s track record.

Case study - TPP Global

Lane Clark and fellow co-founder Edward Davies set up TPP Global, an investment platform using crowdfunding platform Seedrs. 

Both have a background as financial traders and market-beating investors but were frustrated by the performance and high-fees of traditional investment platforms so decided to build their own.

After a year or so of gradual growth through word of mouth and referrals, they were approached by VCs about potential investment to scale up. After considering, they decided this route was not for them as they did not want strong external influences. They spoke to a consultancy about raising money from the public and looked at Crowdcube and Seedrs and decided on Seedrs as they wanted lots of small investors.

“Even if you give up the same proportion of your company, doing so to a few hundred investors is different to giving a portion of your company to one or two sources. It allows us to retain more influence,” explains Clark.

Despite having financial backgrounds, Clark and Davies had no experience in raising capital or valuing a business. They were advised to put in the groundwork before approaching Seedrs, including due diligence, getting regulatory approval and preparing a pitch deck. Fortunately, they received many pledges to invest from existing users of their platform before applying. The business received a pre-money seed valuation of £5.75 million and initially aimed for funding of around £450,000, for 8% of the business. They sent out a request for initial interest just before Christmas 2022, went on a skiing holiday and were surprised when their phones kept ringing regularly with investment pledges.

Once they saw the demand, they increased their investment target, reasoning that more money would allow them to scale more effectively and invest more, quicker, in the business. They reached their revised target of £700,000 in seconds, hit £1 million in 36 seconds and eventually reached £1.4 million, split between around 200 investors in Q1 2023.

“More funding means we can do more stuff; marketing, recruiting and more,” says Clark.

Because VCs approached them, Clark and Davies did not even bother with traditional lending routes. Clark advises other startups that if you are solving someone else’s problem, that is a great starting point. Clark reiterates that it took a lot of work before applying to a platform like Seedrs and that it’s likely they would need around 60% of the initial funding target “in the bag” prior to approaching the platform.

“You must do the groundwork and don’t be too ambitious with projections. It is much better to promise less and over deliver,” Clark points out. “It’s also vital to communicate effectively with your investors and let them know how their investment is performing and keep them updated. This helps if you want to get further investment later.”


P2P lending can offer a lifeline for businesses that need funds fast to grow or take advantage of an opportunity. They can also be a vital source of funds for startups turned down for loans elsewhere.

Prepare thoroughly before applying to increase the chances of being accepted at advantageous terms. Carefully research different P2P options to find one with a good track record that matches your requirements.

You may also be interested in:

Seed Enterprise Investment Scheme (SEIS) explained

Seed funding and pre-seed funding explained

Angel investment explained: plus how to attract an angel investor

Venture capital: how it works and how to attract it

Mezzanine finance explained for small businesses

Embedded finance: what is it and how could it expand your business offering?

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Benjamin Salisbury - business journalist

Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and MoneySavingExpert.com, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property.

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