Peer-to-Peer Lending for Business Borrowers in Australia: How It Works Now

Key takeaways

• business.gov.au describes debt-based crowdfunding as peer-to-peer lending: groups of investors lend to your business and you repay with interest.
• Behind most platforms is a managed investment scheme; a scheme with more than 20 members generally has to be registered with ASIC, with a public company holding an AFS licence as responsible entity.
• For the borrower, peer-to-peer lending works like a term loan: credit assessment, a contract, security or a personal guarantee, and scheduled repayments.
• Smaller peer-to-peer business loans are often unsecured with a director's guarantee; larger ones are more often secured by property.
• Compare the total cost, including the origination fee, against banks, non-banks and private lenders on the same request.
• Ask who your contract is with and what happens to servicing if the platform changes hands or stops lending.

What is peer-to-peer lending for a business borrower?

Peer-to-peer lending (P2P lending) connects borrowers with investors who want to earn interest. Instead of a bank lending its depositors' money, a platform raises money from many investors and lends it to businesses and property owners. business.gov.au's crowdfunding page puts it simply: debt-based crowdfunding is also called peer-to-peer lending, it connects businesses with groups of investors, and backers lend money to your business which you repay with interest over time.

The name suggests individuals lending directly to individuals, and early platforms worked that way, with investors choosing loans one by one. Most Australian platforms today pool investors' money into a fund and lend from the fund, or let investors pick from loans the platform has already assessed. Either way, the borrower deals with the platform, not with the investors.

For a business, the appeal is a lender whose credit rules are set by the platform rather than by bank policy, with terms built around business purposes. The trade-off is usually a higher rate than a bank charges a strong borrower, and a funding source that depends on investors continuing to invest.

How does the platform model work behind the scenes?

Following the money from investor to borrower:

1. Investors put money into a scheme. Pooled investments of this kind are managed investment schemes. ASIC's guidance on registering a managed investment scheme says a scheme generally must be registered if it has more than 20 members or is promoted by someone in the business of promoting schemes, and that schemes whose interests are issued only to wholesale clients may be exempt.
2. A licensed operator runs the scheme. For a registered scheme, the responsible entity must be a registered Australian public company holding an AFS licence, and it lodges the scheme's constitution and compliance plan with ASIC.
3. The platform assesses and prices loans. It runs credit checks, values security, sets a risk grade and a rate, and issues the offer.
4. The loan is made by the scheme or a lending entity. The borrower signs a loan agreement with that entity, and investors receive interest as borrowers repay.
5. The platform services and collects. Repayments, arrears management and any enforcement are handled by the platform or its servicer.

The regulation sits mostly on the investor side. A loan to a business for business purposes generally falls outside the National Credit Code, so your protections as a borrower are mainly in the contract. Our comparison of big four, regional banks, neobanks and non-banks shows where platforms sit alongside the other lender types.

The two funding models matter to you in one practical way. On a pooled model, the fund already holds the money, so an offer is funded once the platform's credit team says yes. On a marketplace model, investors choose which loans to back, so the loan has to attract enough investor money before it settles - ask what happens if it is only partly funded by your settlement date, and whether the platform will fill the gap itself.

What does the borrower side of peer-to-peer lending look like?

From the borrower's chair, a peer-to-peer loan follows familiar steps:

• Submission. Business details, the amount, purpose and term, usually online.
• Documents. Business bank statements, BAS, financial statements, and identification for each director. Property-secured requests add valuation and title details.
• Credit assessment. The platform checks commercial and personal credit files, conduct on existing debts and cash flow, then sets a risk grade.
• Offer. A rate, an origination fee, a term and security requirements. A director's guarantee is common.
• Funding. On a pooled model the fund lends; on a marketplace model the loan is funded by investors before settlement.
• Repayments. Usually monthly, principal and interest, by direct debit.

If the platform takes security over business assets, expect a registration on the PPSR, and read our guide to directors' guarantees before you sign one. Platforms collect a lot of personal and business data; the Australian Privacy Principles set the rules for how organisations covered by the Privacy Act handle it, so read the privacy policy and consent wording too.

What loan sizes and security are typical?

Platforms set their own ranges and they change, so treat this as general. Unsecured peer-to-peer business loans tend to be smaller and shorter, priced off trading history and cash flow, with a director's guarantee standing in for hard security. Larger loans are more often secured, commonly by a first or second mortgage over property, and some platforms specialise in property-secured lending to investors and developers.

Smaller unsecured loans are the typical peer-to-peer product; once a request reaches six figures, property security and a wider field of lenders usually matter more. Whether secured or unsecured suits you is covered in our guide to secured and unsecured borrowing.

How does peer-to-peer lending compare with banks, non-banks and private lenders?

None of these is better in general; the right fit depends on the amount, the security, the term and your credit profile. Our post on when non-bank lenders beat the banks explains how that choice plays out for business borrowers.

What does a peer-to-peer business loan cost?

Platforms price by risk grade: the stronger your trading history, credit file and security, the lower the rate. Most also charge an origination fee, often deducted from the advance. A worked example, for illustration only:

The fee lifts the effective rate by about two percentage points over three years, and by more on a shorter term. Compare offers on total cost and on the cash you receive. Before borrowing, size the need: the working capital gap calculator shows how much cash your debtor, stock and creditor cycle ties up, which tells you whether a term loan is the right tool at all. Our explainer on risk-based pricing shows how grades translate into rates.

What should a business check before borrowing through a platform?

• Who you contract with. The scheme's trustee or responsible entity, or a separate lending company - the name on the loan agreement is your lender.
• Licensing. Check the operator's AFS licence on ASIC's professional registers, and read Moneysmart's guide to private credit to see how investors are warned - it tells you what the platform's funding depends on.
• Continuity. What happens to servicing, top-ups and refinancing if investor inflows slow or the platform is sold. Your loan normally continues on its terms, but a new facility may not be available.
• Early repayment. Some platforms charge an early repayment fee; others allow it with notice.
• Default handling. Default interest, collection costs and how a personal guarantee would be called.
• Data use. Whether your information is shared with investors (usually anonymised) or with partners.

How do you test peer-to-peer lending against the alternatives?

Ask for the same loan from different lender types and compare on total cost, term, security and conditions. A single request that sets out the amount, purpose, security, trading history and how you will repay lets each kind of lender show what it would do.

ADS posts loan requests from $100,000. When you are ready, post one peer-to-peer lending request on ADS, and 200+ verified lenders and brokers - banks' business bankers, non-banks, private lenders and brokers - can ask about it. Speak to your accountant and a licensed credit adviser before you sign.

Frequently asked questions

Is peer-to-peer lending legal in Australia?

Yes. Peer-to-peer platforms operate legally, usually by pooling investors' money in a managed investment scheme run by an AFS licence holder. A scheme with more than 20 members generally has to be registered with ASIC unless an exemption, such as wholesale-only investors, applies. Loans to businesses for business purposes generally sit outside the National Credit Code.

Can a new business get a peer-to-peer loan?

It is harder. Unsecured peer-to-peer business loans usually rely on trading history and bank statements, so a business with little history may be declined or limited. A property-secured loan, where the platform relies on the security and an exit, can be more realistic for a newer business, often with a director's guarantee.

Do I deal with the investors directly?

No. The platform or its lending entity is your lender. It assesses the request, sets the rate, signs the contract with you and collects repayments. Investors see the loan, usually without your identity, and receive interest through the scheme. Your obligations run to the entity named on your loan agreement.

What happens to my loan if the platform closes?

Your loan contract normally continues with the lending entity, or is serviced by a replacement servicer, and you keep repaying on the same terms. What you may lose is access to new funding, top-ups or refinancing from that platform. Ask the platform how servicing continues if it stops lending.

Is peer-to-peer lending cheaper than a bank?

Usually not for a borrower a bank will lend to on standard terms. Peer-to-peer lenders price for the risk they accept and often charge an origination fee. They can be competitive with other non-bank options for borrowers who fall outside bank policy. Compare the total cost on the same request.

Related reading

• Big Four vs Regional Banks vs Neobanks vs Non-Banks
• Non-Bank Lenders: When They Beat the Banks
• Securitisation and RMBS: How Non-Banks Fund Loans

Sources

• Crowdfunding (debt-based crowdfunding and peer-to-peer lending) — business.gov.au
• Register a managed investment scheme — ASIC
• What is private credit — ASIC Moneysmart
• Australian Privacy Principles — Office of the Australian Information Commissioner