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If you’re looking to take out a loan, your first instinct might be to apply for a bank loan. That’s certainly a valid option, but today, borrowers have lending options far beyond what a traditional bank or credit union can offer. For instance, peer-to-peer lending allows investors to work directly with an individual or business looking to take out a loan. Peer-to-peer loans often come with surprisingly low rates and a seamless application process.
We’ll explain more about peer-to-peer lending so you can decide if it’s the right fit for your business.
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Peer-to-peer lending cuts out the bank or financial institution and allows individual investors to lend money to individuals and businesses. Peer-to-peer lending has become a popular alternative form of lending thanks to its advantages for both the borrower and the investor.
Peer-to-peer lending is often a good option for borrowers who have bad credit and wouldn’t qualify for a loan through a bank. It allows them to access the financing they need without having to turn to predatory payday lenders.
Peer-to-peer lending is also a good option for business owners. The process is much faster than it is when you apply through a bank, and you could receive the funds within a week of approval.
In the market for a business loan? Check out our recommendations for the best business loans for small businesses.
In peer-to-peer lending, an investor lends money in exchange for interest on the loan payments. To get started, they sign up for a peer-to-peer lending platform such as Prosper or LendingClub.
These marketplaces match investors with borrowers who are looking to take out a loan. Once the borrower applies for a loan, they fill out some basic information just as they would for a traditional loan.
Most of the financial products offered are personal loans, although the lender can set their own criteria. For instance, some lenders provide loans geared toward debt consolidation. [Read related article: Tools to Help Manage Business Finances]
After the borrower has filled out the application, the lender checks the borrower’s credit score and decides whether to approve them for the loan. If the borrower is approved, the lender will fund the loan.
Peer-to-peer lending allows businesses to obtain financing without applying through a bank. Let’s look at some of the biggest pros and cons of peer-to-peer lending.
Peer-to-peer marketplaces have grown tremendously in recent years, so it can be hard to know where to look first. If you’re interested in taking out a peer-to-peer loan, here are the best options to consider for your small business.
Funding Circle offers small business loans between $25,000 and $500,000, with terms ranging from three months to 10 years. You’ll receive a loan decision within 24 hours, and once you’re approved, you’ll get the funds within three days.
You will need excellent credit to qualify for a loan through Funding Circle. But initially, the company will do a soft pull on your credit, so there is really no downside to applying.
LendingClub offers business loans from $5,000 to $500,000, with repayment terms between one and five years. The company connects businesses to a network of lenders through its partnership with Accion Opportunity Fund.
When you’re ready to apply, you’ll be assigned to a dedicated client advisor, who will walk you through the application process. LendingClub is a good option for businesses that have a hard time getting approved for a loan from a traditional lender.
Upstart offers loans between $1,000 and $50,000 to individuals who are looking to start or expand a business. You’ll make monthly loan repayments over a repayment term of three to five years. Upstart doesn’t charge a prepayment penalty, but there is a one-time origination fee.
Upstart is an excellent option for borrowers who are looking to get a new business idea off the ground. The company prides itself on looking at a borrower’s potential and has tons of positive reviews.
[Read related article: Small Business Guide to Getting a Loan]
In addition to personal loans and small business loans, here are some other loan options available with peer-to-peer lending:
In general, you can use a peer-to-peer loan for any purpose you choose. For example, you can use the money to fund a small business expense, consolidate debt or pay for an upcoming trip.
The only exception is if your lender puts certain limits on what you can use the funds for. For instance, some lenders offer peer-to-peer loans specifically aimed at debt consolidation. As another example, if you take out
The investor takes on most of the risk involved in peer-to-peer lending. Every time an investor lends money, there is a chance they won’t be able to recoup the funds, or if the peer-to-peer marketplace suddenly closes, they may be unable to recover their investments.
But there are risks for the borrower as well. Businesses with bad credit may not qualify for the best rates and loan terms. Although they may receive access to funding, they could end up paying a lot of interest.
If you’re interested in taking out a peer-to-peer loan, your first step is to find a lending marketplace. Look for a site that has a reputation for being trustworthy and a history of good customer reviews. It’s also a good idea to see how that business is rated by the Better Business Bureau.
Once you’ve chosen a marketplace, begin the application process. Start by stating the amount you’re looking to borrow and the purpose of the loan. Then, enter your personal information and agree to a credit check.
After you’ve been approved for a loan, review your interest rate, repayment terms and any additional terms for the loan. If you agree to the terms, you’ll take the loan to the funding stage.
During the funding stage, the potential investors will review your application and decide whether to fund the loan. Once you’ve received the funds, you’ll move into the repayment stage. At this point, you’ll begin making weekly or monthly payments to repay the loan.
If you’re looking to take out a small business loan and hoping to avoid the headache of applying with a traditional lender, peer-to-peer lending is a good alternative. Peer-to-peer lending cuts out the financial intermediary and allows you to borrow money directly from individual investors.
If you have an excellent credit history, you could qualify for a low interest rate. However, borrowers with poor credit are not disqualified from applying. Once you’re approved for a loan, do your due diligence. Compare offers from several lenders, and make sure the loan is worth what you’ll be paying.
Tejas Vemparala contributed to this article.