Chapter 6

Peer-to-peer lending

Peer-to-peer lending is an alternative method of getting a business loan. How does it work?

What is peer-to-peer lending?

With peer-to-peer lending you quite simply borrow from strangers. An online platform matches you up with people willing to lend. This is also called debt crowdfunding, crowdlending or marketplace lending.

At first, these platforms mainly provided personal loans, but this has expanded to business lending (sometimes called peer-to-business or P2B). Some major platforms have even developed partnerships with banks.

How does peer-to-peer lending work?

  1. You complete an online application on the peer-to-peer lending platform website. Say why you need the loan, how much you need, and your preferred length of repayment.
  2. The platform checks your application and determines your risk rating based on factors such as your creditworthiness, security, and revenue projections. The platform sets the interest rates. (The interest rates can also be set by the lenders bidding for the lowest rate through a reverse auction.)
  3. If approved, your loan request is loaded to the platform for interested lenders to browse and decide how much they want to lend to you based on your risk rating and the interest rates.
  4. If a rate looks good, you accept offers from one or more lenders. Or, if no one is interested, the platform removes your listing.
  5. The platform acts as the middleman for transferring the funds and co-ordinating repayments and any security.

Why people choose P2P lending

As the service is offered online, these lending platforms operate more cheaply than traditional banks. This allows them to offer competitive interest rates.

Lenders are attracted by the ability to earn higher returns than they’d get with bank savings or term deposit accounts. And they can protect themselves by spreading their lending across multiple borrowers.

Borrowers are attracted by greater accessibility, faster application processes, and competitive interest rates. Peer-to-business lending platforms may be a better bet for newer businesses who don’t have a credit or cash flow history, those with low credit ratings, and unusual or innovative loan requests.

The lending platform makes its money through fees paid by both parties.

Pros and cons of peer-to-peer lending


Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

How to finance your business

Need finance for your business? Learn about the types of finance, approaching lenders and investors and more.

  1. What is business finance?

    Your new business idea is ready to go. Now you need to find the right small business funding. But where do you start?

  2. How much business funding do you need?

    Knowing how much money you need will help you choose the right type of finance. These tips will help you find a number.

  3. Debt versus equity finance

    Most forms of funding fall into one of two camps. Let’s look at the main pros and cons of debt versus equity.

  4. Main types of finance

    It takes money to make money. So what sort of finance options are there? Here are the types that fund most businesses.

  5. How to get a business loan

    Getting a business loan is still one of the most common ways to finance a business. So let’s look at how to get one.

  6. Peer-to-peer lending

    Peer-to-peer lending is an alternative method of getting a business loan. How does it work?

  7. Friends and family loans

    Friends and family loans may be available when other types of finance aren’t, but they do require some precautions.

  8. Invoice financing

    Ever thought your cash flow would be better if everyone just paid what they owed you? Well, you may not have to wait.

  9. How to find investors

    How do you find investors for equity financing? Let’s look at what types there are and where to locate them.

  10. Angel investors versus venture capitalists

    Angel investors and venture capitalists are alternative finance sources. What can they offer your business?

  11. How crowdfunding works

    Crowdfunding can get you the money to build a business, and the attention to build a customer base.

  12. Small business grants

    Grants are a great funding option for some businesses. They can be a lot of work to get, but the reward is free money.

  13. Pitching for business funding

    Seeking business funding is a major step but you needn’t be daunted. Here’s how to pitch your business.

  14. Tools and guides for your business

    Now that you’re in business, you want to stay there. Xero’s got resources and solutions to help.

Download the guide to financing your business

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