With UK startups increasingly finding it difficult to fund a new business, we look at an alternative lending option that is currently gaining a lot of coverage in the press for all the right reasons – peer to peer lending.

Peer to peer lending is a relatively new form of finance that was only being established in 2005 and as of summer 2013 peer to peer lenders have collectively lent £300 million in the UK.

Peers are helping!

In a nutshell, peer to peer lending is the practice of lending money to ‘peers’ without having to go through traditional financial intermediaries such as banks or other traditional lending institutions.

Peer-to-Peer lenders are everyday people who have money and wish to lend it, in return for a competitive rate of interest (usually between 6-12% pa).  At the moment, these are unsecured personal loans that aren’t subject to regulation but this will all change in April 2014 when the industry will be regulated by the Financial Conduct Authority (FCA).

Make the right choice, it matters!

New small businesses in today’s financial climate are finding it tough to qualify for a traditional bank loan because many UK banks are unwilling to underwrite an unproven, new business with no established credit. This leaves many startups in a conundrum of how to finance their business but there are several alternative options worth exploring.

However, before making any financing decisions, weighing up the pros and cons carefully and doing thorough research on finance options available is critical.  Choosing your sources of financing could well be one of the most important decisions you’ll ever make as a new business owner.

How peer-to-peer works!

New business owners pitch their ideas online via peer to peer lending company websites to individuals interested in lending to other small businesses.  The peer-to-peer lending platforms make the process of introducing lenders and borrowers very simple and the platforms are often exclusively web based.

They take much of the administration away that borrowers experience with their high street bank. As a borrower you register with a company and you are then put into a category based on your credit score. When grouped the lender can then decide on where they want to invest their money based on the risk and return.

As with any loan there is a risk, however the rate of an unsuccessful loan is far lower with peer-to-peer loans than taking a loan out from the bank.

One peer to peer lending platform that’s grown from strength to strength since it started in February 2013 months is Folk2Folk based in Cornwall. They have introduced £11 million of secured loans largely to the business community starting from £25,000 and up to £1million, at interest rates typically of 7-9%.

Loans introduced so far have gone towards projects such as house building, commercial leisure facilities and property acquisitions, together with various renewable energy projects.

If you have an idea or a plan for a startup business of any size but you are lacking the funding for it, peer to peer lending could be a viable alternative worth exploring.