Santander will refer small business customers via its website and letters to Funding Circle when the online marketplace is better placed to help.
Customers will also be signposted from Funding Circle to Santander when they require day-to-day relationship banking support or other services such as international banking expertise, cash management and support for growth.
Funding Circle has helped more than 5,000 businesses borrow £290m, while with its credit assessment process investors have earned an average 6.1% after fees and losses.
Ana Botin, chief executive officer of Santander UK, said: “SMEs need access to multiple sources of finance, and Santander's partnership with Funding Circle is a good example of how traditional and alternative finance can work together to help the nation’s SMEs prosper.
“Peer-to-peer financing is also a useful way to introduce people to the concept of investing in entrepreneurs; an important element in a healthy enterprise economy.”
Around 250,000 businesses a year could benefit from being referred to alternative finance providers.
The government recently consulted on whether it should be mandatory for banks to refer small businesses to other non-bank providers.
Samir Desai, chief executive and co-founder of Funding Circle, said: “This partnership recognises our role as the only marketplace that caters for, and is dedicated to, small businesses.
“In Santander we have found a fellow challenger brand that shares our commitment to putting small business customers’ needs first. They have created a blueprint for other banks to follow.”
In 2011 Santander launched its Breakthrough programme, which helps small businesses fulfil their growth potential by creating jobs and stimulating supply-chain demand.
Funding Circle meanwhile has helped create an estimated 15,000 new UK jobs since its launch in 2010.
Santander’s lending to UK businesses has grown by around 20% per annum over the last four years, while it extended £4.1bn of new facilities to SMEs in 2013.