Peer-to-Peer (P2P) Bridging Finance

By Georgia Galloway | Thursday 13th June | 15 minute read

Peer-to-peer (P2P) bridging finance is a form of short-term loan where the funding is provided by investors rather than traditional financial institutions like banks.

Peer-to-peer (P2P) Bridging Finance

What is peer-to-peer (P2P) bridging finance?

In the peer-to-peer lending model, bridging loan borrowers obtain the capital they need for real estate investments, development projects, or other urgent bridging financing needs through a platform that connects them directly with investors looking to lend their money for a return on investment. A relatively new form of lending, P2P bridging finance was first introduced in 2005. 

How does P2P bridging finance differ from traditional bridging loans?

P2P bridging finance and traditional bridging loans are similar because they provide short-term funding, usually secured against real estate. However, while both P2P and traditional bridging finance serve to provide short-term funding, they differ in their operational models, funding sources, interest rate structures, flexibility, accessibility, and regulatory environments. Below is a summary of the main differences between P2P bridging finance and traditional bridging loans.

  P2P Bridging Finance Traditional Bridging Loans
Source of Funds The capital comes from individual investors or groups of investors who pool their money through a P2P lending platform. The funding is provided by established financial institutions like banks, building societies, or specialised bridging loan companies.
Application and Approval Process Typically, the process is conducted online through a P2P platform, which can offer faster processing times and more streamlined procedures. The process may be more traditional, often requiring in-person meetings, extensive paperwork, and a longer timeframe for due diligence.
Interest Rates and Fees Interest rates can be more variable, often influenced by market demand and supply on the P2P platform. Lenders may offer higher rates based on the perceived risk of the loan. Rates are generally determined by the lending institution based on their lending criteria, market conditions, and the borrower's financial situation.
Flexibility and Negotiation There may be more room for directly negotiating loan terms, repayment schedules, and interest rates with investors. Smaller lenders are more flexible and approach each case individually. Large lending institutions often set terms with less negotiation flexibility, though this can vary by lender.
Accessibility and Requirements P2P bridging loans can be more accessible for individuals who might not meet traditional banks' stringent requirements, offering a viable alternative for those with less conventional borrowing profiles. Typically, these loans require a thorough vetting, including detailed credit checks and financial history reviews.
Risk and Return Profile Investors bear the direct risk of the loan and can achieve higher returns than traditional investment avenues. The lending institution assumes the risk, and the loan cost reflects its internal risk assessments and capital costs.
Regulation and Oversight P2P platforms are subject to specific regulatory standards, but the sector can be less regulated than traditional banking. Lending institutions are highly regulated, providing a framework for risk management, loan security, and borrower protection.

What are the key components of a P2P bridging finance platform?

The key features of P2P bridging finance are listed below.

Direct Funding: 

Investors lend money directly to borrowers through the P2P platform, bypassing traditional banking channels.

Short-term Loans: 

Like traditional bridging loans, P2P bridging finance is typically short-term, ranging from 1-24 months.

Secured Loans: 

These loans are usually secured against property or land, providing a form of collateral for investors.

Speed and Flexibility: 

P2P bridging finance can be arranged quickly, offering flexibility regarding loan amounts, terms, and repayment conditions.

Interest Rates: 

Interest rates can vary based on the loan's perceived risk, the LTV ratio, and the term.

Diverse Investment Opportunities: 

For investors, P2P platforms offer a chance to invest in multiple projects and diversify investment portfolios.

Risk and Return: 

While offering potentially higher returns than traditional savings or investment products, P2P bridging finance also carries risks, particularly the risk of borrower default.


What types of projects are suitable for P2P bridging loans?

P2P bridging loans are versatile and used for various purposes. They typically require short-term funding with a clear exit strategy (how the borrower intends to repay the loan - typically via the sale of an asset, usually property). The most common uses for P2P bridging loans are property real estate transactions and business use. 

Real Estate Transactions

  • Property flipping
  • Buy-to-let investments
  • Property auction purchases
  • Property development
  • Land acquisition
  • Construction completion

Business Financing

  • Business cash flow
  • Working capital
  • Business expansion

Property Management

  • Lease extensions
  • Refurbishment and renovation
  • Conversion projects

Personal

  • Debt consolidation
  • Divorce settlements 
  • Emergency personal finance
  • Tax liabilities

Niche Markets

  • Speciality property purchases
  • Art and acquisitions

Different types of bridging loan lenders

Peer-to-peer lending is a type of bridging lender, but what are the other types of bridging loan lenders?

Alternative bridging loan lenders

Family offices

  • A family office is a private wealth management advisory firm that serves ultra-high-net-worth individuals or families.

Private investors

  • A private investor (angel investor/individual investor) lends personal capital to invest in various ventures, including bridging loans, property development finance, business startup seed investment, real estate acquisitions, and other investment opportunities.

Private equity firms

  • In the context of lending for bridging loans, a private equity (PE) firm operates as a specialised investing company that provides short-term financing solutions to businesses or individuals, primarily for real estate transactions, development projects, or other situations requiring quick funding. 

Institutional lenders

  • In bridging finance, an institutional lender is a bank, credit union, or other financial institution that provides short-term loans designed to "bridge" the gap between immediate funding needs and securing longer-term financing.

P2P bridging finance from the borrowers' perspective

Who can apply for P2P bridging finance?

Peer-to-peer bridging finance is accessible to many P2P borrowers, including individuals, investors, developers, businesses, landlords and entrepreneurs.

Eligibility criteria

While P2P bridging finance is broadly accessible, the eligibility to apply, just like traditional bridging finance, still depends on meeting certain criteria. The lending criteria include:

  • Eligible security
  • Maximum loan-to-value (LTV) thresholds
  • Minimum loan amounts
  • Maximum loan amounts
  • Varying rates for different LTVs
  • Viable exit strategy 
  • Purpose of borrowing
  • Creditworthiness

How does the application process for P2P bridging finance work?

The application process for P2P bridging finance involves several key steps:

Initial application: Borrowers start by submitting an initial application, which generally requires basic information about the borrower and the intended use of the funds. This includes details about the property involved, the loan amount, and the expected repayment strategy (usually the sale of the property or obtaining longer-term financing).

Detailed assessment: After the initial application, the platform conducts a more detailed assessment. This involves a thorough review of the borrower's financial status, including credit checks, proof of income, and sometimes the viability of the exit strategy (how the borrower plans to repay the loan). The property will also undergo valuation to ensure it provides sufficient security for the loan.

Provisional offer: If the initial checks are satisfactory, the platform may issue a provisional offer outlining the terms of the loan, including the interest rate, the loan amount, any fees, and other terms and conditions. This offer is typically subject to further verification and successful loan funding by investors on the platform.

Legal due diligence: This typically includes examining property titles, planning permissions, and any other legal matters that could affect the property’s value or the legality of the proposed transaction.

Funding: Once all checks are completed and due diligence is satisfactory, the loan is listed on the platform for investors to fund. The speed with which the loan is funded can vary based on investor interest and the perceived risk associated with the loan.

Completion and disbursement: After the loan is fully funded, final documents are signed, and the legal work is completed, the funds are released to the borrower. This process can be very quick, sometimes within a few days, assuming no complications.

Repayment: Bridging loans are short-term, typically lasting from a few months up to 12 months, although they can last up to 2 years. The borrower must repay the loan at the end of the term, usually through selling property or refinancing.


P2P bridging finance from the investors' perspective

Who can invest in P2P bridging finance projects?

P2P bridging finance investors tend to fall into the following categories:

Individual investors

Most P2P platforms allow individual investors to lend money. Peer-to-peer lenders must be over 18 years old and pass identity checks. They might also need to demonstrate that they understand the risks associated with P2P lending, including potential capital loss.

Institutional investors

These can include banks, investment funds, and other financial institutions that seek to diversify their portfolios. Institutional investors often can invest larger amounts of money in P2P loans, including those for bridging finance.

High-net-worth individuals or professional investors

Some platforms may require lenders to qualify as high-net-worth individuals (HNWI) or professional investors. This status is usually determined based on the investor’s net worth, investment experience, and income.

What are the risks and rewards for investors in P2P bridging loans?

The reward for P2P bridging loan investors is a higher rate of return than their money compared to traditional investments. But there are risks associated with P2P bridging loan investments:

P2P bridging loan investment rewards

  • Higher returns than traditional savings
  • Investment diversification
  • Investment control
  • Monthly cash flow

P2P bridging loan investment risks

  • Risk of borrower default
  • Risk of early or late repayment
  • Risk of the peer-to-peer platform going bust
  • Lack of liquidity

How can investors evaluate and select P2P bridging finance opportunities?

P2P bridging finance lenders can choose specific projects or borrowers to fund. This selection capability is one of the attractive features of P2P lending, as it allows investors to make decisions based on their risk tolerance, interest rates, term length, and investment goals.

You can read more about the selection process for lenders on our Peer-to-Peer Lending page.


P2P bridging loan financial and legal aspects

What are the typical interest rates and fees for P2P bridging finance?

The interest rates and fees associated with P2P bridging finance vary widely depending on the loan and the lender's specifics. Here's a general overview of what to expect:

Interest rates: Due to their short-term nature, bridging loans are typically quoted with monthly interest rates. Rates can vary from as low as 0.35% per month to higher rates around 2% per month.

Fees: In addition to interest, P2P bridging loans often come with various fees. Common fees include arrangement fees, which may be around 1-2% of the loan amount, and exit fees, which can also be about 1% of the loan.

Loan amounts and LTV ratios: The amount you can borrow typically depends on the loan-to-value (LTV) ratio, ranging from 65% to 80% of the property's value. Lenders will provide a loan of up to 65-80% of the property's appraised value used as security.

How is the loan-to-value (LTV) ratio determined in P2P bridging loans?

In P2P bridging loans, the loan-to-value (LTV) ratio is determined similarly to traditional lending but with some nuances specific to the P2P context. Here’s how it generally works:

Property valuation: The LTV ratio begins with a professional appraisal of the property’s current market value. This appraisal is crucial as it provides the baseline for calculating how much a borrower can receive relative to the property's worth.

Loan amount assessment: Based on the appraised value, the P2P platform or lenders will decide the maximum loan amount they are willing to offer. This decision also factors in the risk appetite of the lenders and the specific policies of the P2P platform.

Determining the ratio: The LTV ratio is calculated by dividing the loan amount by the property's value and multiplying it by 100 to get a percentage. For example, if the property is valued at £100,000 and the loan amount is £75,000, the LTV ratio would be 75%.

Risk considerations: P2P lenders may have different LTV thresholds based on their risk assessment models. Typically, higher LTV ratios are seen as riskier. Therefore, loans with higher LTVs may carry higher interest rates to compensate for the increased risk.

Regulations and guidelines: In the UK, P2P lending is regulated, and specific guidelines may cap LTV ratios for certain types of loans, especially those secured against residential properties or where regulatory compliance is stringent.

Investor comfort: Since P2P platforms fund loans through individual or institutional investors, the acceptable LTV ratio may also reflect the comfort levels of these investors with certain risk profiles.

What legal protections exist for borrowers and lenders in P2P bridging finance?

Borrowers and lenders in P2P bridging finance are protected by various legal and regulatory frameworks designed to ensure fair practices and minimise risks. Here are the key protections in place:

Legal Protection in P2P Bridging Finance Details
Financial Conduct Authority Regulation The FCA oversees the P2P lending industry, ensuring that platforms operate transparently and protect the interests of both borrowers and lenders. P2P platforms must be authorised by the FCA and adhere to standards that cover conduct, financial stability, and customer treatment.
Client Money Protection Regulations require that P2P platforms separate clients' money from their business funds. This segregation helps protect lenders’ and borrowers' funds if the platform faces financial difficulties.
Mandatory Disclosures P2P platforms must provide clear, accurate, and timely information about the risks associated with P2P lending, the features of different loans, and the terms of the agreement. This ensures that all parties are well-informed before making any financial commitment.
Data Protection Under the UK's Data Protection Act and the General Data Protection Regulation (GDPR), P2P platforms must handle personal data securely and confidentially and offer further safeguards for personal and financial information.
Complaints and Dispute Resolution The FCA mandates that P2P platforms have effective procedures for handling complaints. If borrowers or lenders are dissatisfied with the resolution of their complaints by the P2P platform, they can access the Financial Ombudsman Service (FOS) to provide an independent review and potential remedy.
Credit Checks and Assessments To protect lenders' interests and maintain the platform's integrity, P2P platforms perform credit checks and assess borrowers' creditworthiness, reducing the risk of defaults and enhancing loan security.
Wind-Down Plans P2P platforms must have robust plans for an orderly wind-down of their operations. These plans ensure that existing loans are managed and repaid even if the platform ceases to operate. This provides a contingency plan that protects both borrowers and lenders.

Advantages and disadvantages of P2P bridging finance

P2P bridging finance offers enhanced flexibility, faster processing times, and broader accessibility compared to traditional lending methods, but there are also drawbacks that borrowers and lenders must be aware of.

What are the main advantages of P2P bridging finance over traditional methods?

Speed of funding: P2P platforms typically process loan applications faster than traditional banks. This speed is crucial in real estate transactions, where quick access to funds can be decisive in securing a property.

Flexibility: P2P bridging loans offer more flexible terms, including loan amounts, repayment schedules, and collateral requirements. This flexibility is beneficial for borrowers with unique needs or those who may not meet the strict criteria set by traditional banks.

Simpler application process: The application process for P2P loans is often more straightforward and can be completed entirely online. This digital approach reduces paperwork and the overall complexity involved in securing financing.

Innovative funding solutions: P2P platforms frequently provide solutions not typically available from traditional lenders, such as loans for unusual properties or situations that do not fit conventional banking criteria.

Competitive interest rates: While sometimes higher, the rates offered by P2P platforms can also be competitive compared to traditional banks' rates, especially for borrowers with good credit histories or those offering substantial collateral.

Direct connection between borrowers and lenders: P2P lending allows investors to directly fund borrowers, potentially resulting in more personalised deals and a better understanding of the borrower's requirements and risk factors.

Availability to a wider range of borrowers: P2P platforms can serve borrowers who might be overlooked by traditional banks due to non-traditional income sources or credit issues, broadening their access to finance.

What are the potential drawbacks or risks of P2P bridging finance?

Peer-to-peer bridging finance, while providing flexible and rapid funding options, carries several potential drawbacks and risks:

High interest rates: Typically, P2P bridging loans have higher interest rates than traditional bank loans. This can significantly increase the cost of borrowing, particularly for longer-term projects where delays might extend the loan period beyond the initial plan.

Regulatory risks: The P2P lending market is subject to regulatory changes. These changes can affect the operations of P2P platforms, potentially impacting the terms and availability of loans. This can introduce uncertainty for both lenders and borrowers.

Default risk: There is a risk of borrower default, which can be higher in P2P lending than traditional banks with stricter lending criteria. While P2P platforms conduct credit checks, the diverse nature of projects funded via bridging loans may increase the financial risk to investors.

Market volatility: The property market, a common area for bridging loans, can be volatile. Changes in property values can affect a loan's loan-to-value ratio, impacting the security backing the loan and possibly leading to losses if a borrower defaults and a property needs to be sold at a lower price.

Limited liquidity: Investments in P2P loans are typically illiquid. This means that lenders may find it difficult to withdraw their funds before the loan matures, especially if there is no secondary market for selling the investment.

Dependence on platform stability: The stability and reliability of the P2P platform are crucial. Issues such as technical disruptions, poor management, or financial instability of the platform itself can pose risks to both borrowers and lenders.

Complicated exit strategies: Bridging loans are generally short-term, and a clear exit strategy is required. If the exit strategy fails, for example, if a borrower cannot secure long-term financing or sell the property as planned, it can lead to difficulties in loan repayment.


Future prospects of peer-to-peer lending

The prospects of peer-to-peer lending appear to be strong. Peer-to-peer lending is relatively new, starting in 2005, and the worldwide market size of P2P lending is increasing. Global market intelligence company Skyquest has forecast the following growth:

The peer-to-peer Lending market size is poised to grow from £149.58 billion GBP ($190.43 billion USD) in 2023 to £1183.09 billion GBP ($1506.24 billion USD) by 2031, growing at a CAGR of 29.5 % during the forecast period (2024-2031).

Source: Skyquest, March 2024

What are the current trends affecting P2P bridging finance?

Current trends in the UK's P2P bridging finance sector reflect the industry's adaptation to broader economic changes and evolving market demands. Here are some key trends impacting this market:

Increased market activity: Bridging loan transactions have significantly risen, reaching an all-time high of over £831 million in 2023. This surge is attributed to the instability in the mainstream mortgage market and borrowers' need for quicker, more flexible financial solutions.

Growth in regulated bridging: The demand for regulated bridging loans has also increased, which indicates a shift towards more oversight and protection in bridging finance. Rising interest rates and the withdrawal of some mortgage products, pushing more borrowers towards regulated options, are likely influencing this trend.

Diverse use cases: Bridging loans are increasingly used for various purposes, including auction purchases, business funding, and property development. This diversification is partly driven by tightened credit conditions, which make traditional financing less accessible or flexible for business owners and property developers.

Technological integration: Technology continues to play a significant role in the sector, enhancing the speed and efficiency of loan processing. 

Market challenges: Despite the growth, the sector faces challenges such as higher interest rates and a complex property market influenced by economic factors like inflation and changes in property demand. These factors necessitate robust exit strategies and careful financial planning.


What lessons have been learned from failed P2P bridging finance projects?

In the aftermath of failed high-profile peer-to-peer bridging finance projects like Lendy (lending platform collapsed in 2019) and Wellesley (no longer offering P2P lending), lessons had to be learned. These failures exposed significant vulnerabilities within the P2P property lending sector, leading to substantial financial losses for investors and prompting a regulatory crackdown. Key lessons that were learned include:

Risk concentration: The failures were largely attributed to P2P platforms having concentrated loan books filled with high-risk projects. This lack of diversification exacerbated the financial impact when projects defaulted.

Regulatory oversight: Stricter regulations to protect investors came about after the collapses, which led to heightened scrutiny from the Financial Conduct Authority. These regulations include investment limits for new P2P participants and requirements for platforms to assess investors' knowledge and experience.

Due diligence and transparency: The failures highlighted the need for P2P platforms to conduct thorough due diligence and maintain transparency with their investors about the risks and the health of the loan book.

Market conditions: The economic environment, influenced by factors such as the COVID-19 pandemic, has reshaped the demand and risk associated with property investments, necessitating more robust risk management practices by P2P platforms.

Investor education: There is a growing recognition that P2P investments should ideally target more sophisticated investors who understand and can tolerate the associated risks.


Peer-to-peer regulatory and compliance issues

How do P2P bridging finance platforms ensure compliance with financial regulations?

Peer-to-peer bridging finance platforms ensure compliance with financial regulations through stringent user verification processes, adherence to anti-money laundering (AML) guidelines, and implementing Know Your Customer (KYC) protocols. They use advanced technology to monitor transactions and detect suspicious activities, thereby mitigating the risk of fraud. Additionally, P2P platforms frequently engage in audits and update their compliance procedures to align with evolving legal and regulatory frameworks, ensuring they remain compliant and secure for all parties involved.


Conclusion

Peer-to-peer bridging finance connects borrowers directly with investors via online P2P platforms, bypassing traditional financial institutions. P2P bridging finance primarily supports borrowers with real estate investments and development projects with short-term funding. Unlike traditional bridging loans provided by banks or specialised companies, P2P bridging loans are funded by individual or group investors, offering faster application processes and potentially more variable interest rates based on market dynamics.

Key aspects of P2P bridging finance include the direct funding model, security against property, and flexibility in terms, conditions, and repayment schedules. These loans are typically short-term, secured against real estate, and designed to solve funding gaps quickly. Interest rates vary widely, generally higher than traditional loans, reflecting the perceived risk and shorter loan terms.

P2P bridging finance caters to a broader range of borrowers, particularly those who may not meet traditional banking criteria. It offers an alternative for individuals with less conventional profiles or those needing quicker finance solutions. However, it also carries risks such as higher interest rates, the potential for investor and borrower defaults, and dependency on platform stability.

The Financial Conduct Authority regulates the sector, ensuring platforms operate transparently and protecting participants' interests through stringent regulatory standards. P2P platforms must ensure compliance through rigorous user verification, anti-money laundering protocols, and regular audits to align with legal and regulatory frameworks.


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