How does it work?
Imagine you need a loan to expand your business and invest in an ambitious marketing campaign. You run a small business so you don’t have a lot of assets to offer as collateral for a loan from the bank, so ideally you need an unsecured loan.
You approach a peer-to-peer lender and tell them how much you need to borrow. The provider asks about your business (for example, your annual turnover and trading history etc.) If you pass their initial eligibility criteria, they’ll set about finding the funding you need.
Rather than providing the funding themselves, they’ll ask a panel of investors to put together small amounts of funding, which collectively adds up to the full amount you need. They do this in a number of different ways including auction-style bidding or just setting a rate and waiting for investors to choose a loan to invest in.
For you, it’s no different from getting a simple business loan. You only deal with the P2P provider, and they transfer the loan amount to you.
Isn’t it just the same as crowdfunding?
Kind of. But crowdfunding tends to refer specifically to donations or equity purchases, rather than a straightforward loan.