What Is Peer-to-Peer Lending?

What is peer-to-peer lending?

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. 

How does peer-to-peer lending work?

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.

Pros and cons of peer-to-peer lending for businesses

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. 

Pros

• Streamlined application process: The most significant advantage of peer-to-peer lending is the easy application process. Businesses have to deal with far less paperwork and will know almost immediately whether their application is approved or denied.
• Low rates: Peer-to-peer lending comes with surprisingly low rates because individual investors don’t have to pay the same overhead as banks do. Of course, you should always do your homework to ensure you’re getting the best deal possible.
• Options for imperfect credit: A higher business credit score is always better when you’re applying for a loan, but with peer-to-peer lending, imperfect credit won’t necessarily disqualify you.
• Fast funding: Once you’re approved for a peer-to-peer loan, you should receive the funds within a week. However, some marketplaces promise financing in as little as three days.

Cons

• Fees: Although you may receive a low interest rate, peer-to-peer loans often have additional fees. For instance, some lenders charge an origination fee of between 1 percent and 8 percent of the total loan amount. Make sure you read the fine print before you agree to the loan.
• High rates: One of the advantages of peer-to-peer lending sites is that excellent credit isn’t necessary to qualify. But if you have poor credit, you may get stuck with high rates and unfavorable repayment terms.

Peer-to-peer lending sites for businesses

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

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

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

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]

Other types of loans available with peer-to-peer lending

In addition to personal loans and small business loans, here are some other loan options available with peer-to-peer lending:

• Debt consolidation
• Mortgages
• Student loans
• Auto loans
• Auto refinancing
• Medical expense financing

Is peer-to-peer lending right for your business?

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.