Peer-to-peer business lending comes to the scene when banks and other traditional ways of funding limit the options of getting a small business loan.
P2P lenders connect borrowers with investors who want to invest in small businesses at competitive interest rates. Although this financing has recently gained popularity, it’s primarily aimed at people looking for a personal loan.
But should you borrow from a peer-to-peer lender? Or is it better to take a small business loan from another alternative source?
This complete guide will explain how peer-to-peer lending works and outline the pros and cons of using this type of financing for your small business.
What is Peer-to-Peer Lending For Small Businesses?
A traditional loan usually involves a financial institution like a bank or credit union advancing funds to a borrower.
But in peer-to-peer loans, the relationship is between a borrower and an individual. The peer-to-peer lender, a P2P lender, acts as a “go-between” or a middleman.
How does that help? Why eliminate the financial institution from the lending process? Doing this provides benefits to both the borrower and the lender.
With the bank out of the picture, borrowers can receive funds at a lower rate, while investors (the people advancing the cash) can earn a higher return.
At least on paper. The peer-to-peer platform (the middleman) charges an “origination fee,” which could be a significant amount.
For example, Lending Club, a popular online peer-to-peer lending platform, requires borrowers to pay an origination fee that ranges from 3.49% to 7.99%. On a loan of $30,000, the fee could be as much as $2,400.
What Are The Average Terms Of Peer-to-Peer Lending?
On average, peer-to-peer lending terms can vary from six months to five years. However, the borrowers and lenders will ultimately determine the specific terms.
Generally speaking, shorter-term loans will have higher interest rates, while longer-term loans will have lower interest rates.
How Does a Peer-to-Peer Loan Works?
The modern age of lending now includes peer-to-peer business lending. Independent investors can play a major role in financing people’s businesses.
When applying for a P2P loan, lenders will collect and verify a borrower’s personal and financial information.
They will check your business or personal credit score and financial information to determine whether or not lending you money is a high risk.
You can obtain credit from investors through peer-to-peer lending without going through banks or credit unions for your business.
This type of lending eliminates the need for a bank or other financial institution and lets private investors lend money to people and businesses.
P2P lending has gained popularity as an alternative lending method.
How Do Payments Work?
Like most loans, a P2P loan requires you to make predetermined monthly payments to recoup the amount plus interest.
The size of your loan, the length of the loan, and your APR all affect your monthly payment amount. Typically, an origination fee represents a small portion of the loan amount.
What Is P2P Lending Used For?
Most peer-to-peer lending platforms have traditionally lent money to people rather than businesses. But lately, this pattern has begun to shift.
The Small Business Administration claims that P2P lending is expanding due to online lending platforms filling a void in the market for funding for small businesses.
P2P business loans are a great way to grow your finances and invest in your business. Businesses opt to use P2P loans to do the following:
- Consolidating your debt
- Training and Resources for staff
- Business Expansion
- Purchasing equipment
- Cash flow
If your business needs financial relief quickly, you should look into applying for a peer-to-peer loan.
This kind of financial support can help you expand your business, provide resources to staff and consolidate pre-existing debts.
You can achieve these goals with a business loan since alternative lenders have lower overhead costs and can therefore pass the savings onto their borrowers through lower interest rates.
Why You Should Use a Peer-to-Peer Loan
P2P business loans are often fixed-rate loans with shorter terms and lesser amounts than those provided by banks. P2P loans can meet credit demands in markets where traditional lending by financial institutions would not be feasible.
P2P lenders use several investors to complete loans, which allows your chance of approval for a loan increase.
Typically, you can apply online and receive a decision promptly. So let the lender disburse your loan in a matter of days if they authorize it.
You should consider P2P loans because the process is quick and easy. You’ll probably get your money considerably faster than through a bank.
P2P lending has quickly become a premiere way of borrowing funds.
Fund Business Expansion
This implies that small enterprises can finance expansion, manage working capital, or respond to unforeseen financial demands even though they might not otherwise have access to cash.
Getting money from peer-to-peer lending platforms can help businesses find funding to expand or cover overhead costs.
Great Credit-Based Incentives
You may be eligible for an unexpectedly low rate if your credit is good.
Peer-to-peer lending is frequently a good choice for borrowers with bad credit that a bank wouldn’t approve.
They can now get the financing they require without using shady payday lenders.
Lack of Insurance on Loans
The Securities and Exchange Commission (SEC) requires platforms that sell securities to the general public to register. This government oversight looks to mitigate risks in your lending.
Although the SEC requires that lenders publically register, the FDIC does not insure these financial transactions.
This lack of insurance puts lenders and borrowers at risk if either party chooses to default on their loan.
Getting Money Back by Off-Boarding Loan
As a lender, you will need to find another lender to take on the loan if you want your money back.
Off-boarding your loan can be a massive headache if you can’t easily find another lender willing to take on your loan.
Certain peer-to-peer lending platforms will arrange the loan transfer internally, although they may require you to pay a fee.
Lender Makes Less if Borrower Makes Early Payments
Lenders are motivated to engage in loans due to the prospect of increased returns.
However, these returns can be lower than expected if the borrower opts to repay the P2P loan earlier than the pre-established timeline.
Pros and Cons of a P2P Lending
There are some advantages and disadvantages of peer-to-peer lending in business. Let’s take a look at some of them.
Advantages of peer-to-peer loans
- The entire process is online. You usually don’t have to submit any paper documents.
- Funds could be available in a matter of days. You wouldn’t have to go through a long-drawn approval procedure.
- Most P2P loans don’t carry a prepayment penalty.
- You can usually utilize the funds in any manner you like. Of course, the lender restricts the usage to business purposes.
- Borrowers turned down by banks may find that they can get a P2P loan.
- Easier loan approval
- Fund business expansion
- Great credit-based incentives
Drawbacks of peer-to-peer lending for business
- You will likely have to pay a high-interest rate if you have poor credit.
- The amount that you can raise from a peer-to-peer loan is usually restricted.
- Origination fees can raise the total cost of borrowing.
- A delay in making repayments can harm your credit score.
- Some P2P websites require you to pay various fees and the interest paid by the lender. After taking the loan, you will know these “hidden” fees.
- A borrower could also be the target of a scam. The P2P lender could ask you to pay the origination fee and disappear.
- Lack of insurance on loans
- Getting money back by the off-boarding loan
- The lender makes less if the borrower makes early payments
Before signing up for a peer-to-peer loan, you should consider the advantages and disadvantages of p2p lending. When you engage in a peer-to-peer loan, you should understand the risks of a lending contract.
What is Peer-to-Peer Lending For Small Businesses?
P2P lending has risk, just like any other investment, particularly from the lender’s standpoint. P2P lending platforms sometimes offer lower credit requirements than traditional banks, suggesting a higher chance of default on some loans.
Some lending platforms aim to protect lenders by evaluating applicants’ propensity to repay their loans.
When evaluating applicants, you can calculate their credit risk rates based on credit history and influx of cash.
Although loans with lower ratings may offer better rates of return, they also pose a greater risk.
Both state and federal laws govern platforms for peer-to-peer lending. P2P marketplaces have the necessary permits in the states where they are active.
Best P2P Lending Platforms to Consider
Peer-to-peer business lending is a resourceful way to grow your business and relieve financial burdens. Some of the top peer-to-peer lenders are
Upstart is a popular P2P lender for businesses. Its main features are:
- Fast and easy application process: Upstart’s online application only takes a few minutes to complete, and you can get an answer in as little as 24 hours.
- Affordable loans: Upstart offers loans starting at $5,000, with APRs as low as 5.99%.
- Flexible repayment terms: Upstart offers loans with terms of 3 or 5 years.
- No hidden fees: Upstart doesn’t charge any origination, prepayment, or late fees.
Upstart is a great option for businesses looking for fast, affordable financing. Its simple application process and flexible repayment terms make it a popular choice for small businesses.
Here are some of the key features that make Prosper an attractive option for business owners:
- Affordable financing: They offer competitive interest rates on loans, making it an affordable option for businesses.
- Flexible repayment terms: Flexible repayment terms allow businesses to choose a repayment plan that fits their needs.
- No prepayment penalties: Prosper does not charge prepayment penalties, giving businesses the freedom to repay their loans early if they so choose.
- Fast funding: Prosper offers fast funding, with loans being funded as quickly as 48 hours after approval.
- Borrower-friendly: Prosper is a borrower-friendly lender with a focus on helping businesses succeed.
LendingClub offers businesses many advantages as a peer-to-peer lender.
- Competitive rates for business loans: LendingClub’s platform allows businesses to directly access capital from a large pool of investors rather than through traditional banking channels.
- Streamlined application process: Businesses can apply for loans online and receive funding in as little as 10 days.
- Flexible repayment structure: Businesses can choose to repay their loans over 3 to 5 years.
- Collateral: LendingClub does not require businesses to purchase collateral for their loans. This makes it an ideal option for businesses that may not have the required collateral to secure a loan from traditional lenders.
Thanks to lenient credit requirements from alternative lenders, you can also get easy funds with a business loan.
Guide to Choosing the Best Peer-to-Peer Lending Websites
Less than 20 years have passed since the founding of peer-to-peer lending companies. However, there are already a lot of online lending marketplaces that compete.
When picking a peer-to-peer lending website, you should consider the different types of loans offered, fees, speed of approval, and desired term length.
These loan features can help you narrow down your parent company and secure your business finances with a reliable source.
Your imminent need for funding may sway you to use a more rapid website if it requires higher fees and promises of collateral.
When you compare peer-to-peer lenders, there are several important factors to consider.
The most important factors are:
This is the length of time you have to repay your loan, and it can range from a few months to several years.
The shorter the loan term, the lower the overall cost of the loan, but you may have to make higher monthly payments.
Annual percentage rate (APR)
This is the interest you will pay on your loan, expressed as a percentage of the total loan amount.
The higher the APR, the more you will pay in interest over the life of the loan.
Some lenders charge a penalty if you pay off your loan early.
This can add significantly to the cost of your loan, so be sure to ask about prepayment penalties before agreeing to a loan.
Origination fees are another fee that can add to the cost of your loan. This is a fee charged by the lender for processing your loan application. The higher the origination fee, the more you will pay upfront costs.
Minimum credit score
Minimum credit score requirements vary from lender to lender.
Some lenders require it, while others do not. Check the minimum credit score requirements of any lender you consider before applying for a loan.
Some lenders require collateral, such as a car or home, while others do not.
Loan disbursement can also vary from lender to lender. Some lenders disburse loans in a lump sum, while others disburse loans in installments.
Be sure to ask about loan disbursement before agreeing to a loan.
When comparing peer-to-peer lenders, consider all these factors to ensure you get the best deal possible.
Peer-to-Peer Lending Requirements
A few key requirements are generally required for business loans, whether from traditional lenders or peer-to-peer (P2P) platforms.
These requirements include:
- A minimum credit score: Most P2P platforms will have a minimum credit score requirement, typically in the 640-660 range.
- Time in business: P2P platforms will typically require businesses to be in operation for at least a year and often two years before they qualify for a loan.
- Annual revenue: Most P2P platforms will have a minimum annual revenue requirement, typically $50,000-$100,000.
- Collateral: Many P2P lenders will require some form of collateral, such as a lien on a business’s bank account or equipment, to secure the loan.
- Personal guarantee: Most P2P loans will also require a personal guarantee from the business owner, meaning that the owner is personally responsible for repaying the loan if the business is unable to do so.
- Additional documentation: In addition to the above requirements, P2P platforms will typically also require various financial documents from the business, such as tax returns, bank statements, and financial projections.
Tips on Qualifying for a P2P Loan
Small business owners should take care of these items to increase their chances of getting fund loans.
- Check your credit score and history
- Shop around for the best rates
- Consider a secured loan
- Build up your savings
- Have a solid business plan
- Get a co-signer
- Join a peer-to-peer lending group
- Be prepared to pay higher interest rates
- Do your research
Should you borrow from a P2P financing platform? Or would a traditional small business loan be a better idea?
How to Apply for a Peer-to-Peer Loan
These online marketplaces pair prospective loan borrowers with investors.
The borrower will fill out some basic information when applying for a loan, just like they would for a conventional bank loan.
You can secure your P2P loan in five easy steps.
Complete an Online Application
Online, provide basic personal information and explain how you want to use the money. Filling out the form usually just takes a few minutes.
In this application, you will disclose your current financial situation and make an inquiry about how much money you want to borrow.
Receive a Borrower Rating Score
After submitting your online application, the lending website will sift through your financials and project how reliable of a borrower you will be.
They will make this assessment based on your proof of income, pay stubs, W-2s,s and tax returns. This financial paperwork is essential for lenders to weigh the risk of taking on your loan.
Review Loan Options
You can choose the peer-to-peer loan that best meets your needs if they approve the loan. Every loan has different conditions, so review loan options thoroughly.
Let Investors Consider Your Application
At this point, you either learn that no investors have expressed interest in funding your loan or that one or more have expressed interest.
Investors make decisions rapidly, so a lender can pick up your loan anytime. Unless the lender needs further information from you, the full loan approval procedure usually takes approximately a week.
Once you provide the P2P lending organization with more information about your money and the required papers to authenticate your name, income, and employment if investors agree to support your loan.
Peer-to-Peer Lending vs. Traditional Small Business Loans
Let’s compare peer-to-peer business loans with a business loan from a traditional bank:
|Peer-to-peer loan||Traditional small business loan|
|Rate of interest||It’s possible to get low rates, but you should have a good credit score||These usually carry low rates of interest|
|Borrowing limit||Most P2P loans are for relatively small amounts||Banks have high lending limits. If you’re eligible, you could borrow as much as you need|
|Speed of approval||You could obtain funds within a few days of your application||Normally a lengthy process. It could take weeks to get funds|
|Probability of getting a loan if you have poor credit||It’s possible – you may find someone willing to lend to you||Highly unlikely|
|Use of funds||Borrowers can usually decide how to use the funds||The lender will specify how you can use the borrowed funds|
Here are the differences as well as the similarities between peer-to-peer lenders options and traditional small business loans:
P2P loan compared to small business loan
P2P loans are good for borrowers with poor credit and have quick approval. They are flexible in using funds, but you have a low borrowing limit.
On the other hand, small business loans have a lengthy approval process; in some cases, the lender restricts the fund usage. However, you have a high borrowing limit and are often available only if you have a good credit score.
Both cases have low APRs (but P2P loans carry low APRs only if you have good credit).
One of the most significant disadvantages of traditional business loans is that the approval procedure can be cumbersome.
The lender could ask you to submit various paper documents and wait for weeks to hear from the bank.
If you want a quick response, a loan from Camino Financial, an online small business lender, could be your best option.
In fact, Camino Financial has fewer business loan requirements than other lenders.
Now, let’s compare peer-to-peer lending with alternative small business loans.
Peer-to-Peer Loans vs. Alternative Small Business Loans
Alternative lenders can be a good option for small business borrowers. Their credit requirements are usually more flexible than those of banks. Alternative lenders also have another significant advantage. They can process a loan application very quickly.
Here’s how a P2P loan stacks up against an alternative small business loan:
|Peer-to-peer loan||Alternative small business loan|
|Loan amount||The loan amount from a peer-to-peer lender could be less than the sum you need||Possible to borrow large amounts|
|APR||If you have poor credit, be prepared to pay a high rate of interest||APRs are usually lower than those offered by P2P lenders|
|Document requirements||Minimal. But you may have to provide a business plan or justify why you need the money.||The lender will ask for your financial statements and your bank records|
|Funding time||Quick approval is possible||Quick approval|
|Use of funds||Borrowers could have the option to decide||You must use the borrowed funds for your business|
|Loan approval process||Online||Online|
P2P loan compared to alternative small business loan
P2P loan amounts are usually low, have minimal documentation, high rate of interest for borrowers with poor credit, and borrowers could decide how to use funds.
On the other hand, alternative business loans make it possible to borrow large amounts, and they have lower APRs. Also, you’ll need financial statements and bank records and use the borrowed funds for the business.
You’ll have an online, easy and quick loan approval process in both options.
For most entrepreneurs, an alternative small business loan is the ideal way to raise money. Borrowing from a lender like Camino Financial can provide you with the cash that you need for your firm. Take out a little time to understand how Camino Financial business loans work.
Camino Financial: Your Best Choice
At Camino Financial, we will do our best to provide you with the money that you need to run your business.
Here are some of the advantages that you get with Camino Financial:
- Like P2P lending, our entire process is completely safe and effective online. This allows us to provide you with fast funding.
- Our small business loans range from $5,100.00 to $35,000.00, a larger amount than what you would probably get from a P2P loan, and are available at annual rates ranging from 12% to 40.00%.
- We only charge a closing fee, and there are no other hidden fees. Your monthly payments are fixed and will never charge during the loan term. There is no early payment fee if you decide to pay off your loan at any time.
- Our requirements are very flexible. For example, you don’t need a bank account to apply. Your ITIN with suffice.
- You don’t need to put up any collateral either for your loan request.
Our loan specialists will assist you at every stage and help you to get the lowest possible rate on your loan.
What is peer-to-peer lending for small businesses?
Peer-to-peer lending for small businesses is a way for businesses to get financing from individuals instead of from a bank.
Small businesses often have a tough time getting financing from banks because they don’t have much collateral or are not profitable enough yet. But with peer-to-peer lending, business owners can get financing from individuals who are willing to invest in their business.
Can you make money with peer-to-peer lending?
Yes, you can make money with peer-to-peer lending. Many people are doing this and making a good return on their investment.
What is a P2P loan?
A P2P loan is a type of loan in which two individuals (the “peers”) agree to lend money to each other without the intervention of a traditional financial institution.
In most cases, the borrower and lender connect via an online lending platform, which handles the transfer of funds and collects payments on behalf of the two parties.
Is peer-to-peer lending worth it?
Peer-to-peer lending can be a great way to get a better return on your money than you would with a traditional savings account while also helping others in the process.
Peer-to-peer lenders pool money from many different investors to loan out to borrowers who might not be able to get a loan from a bank.
Who Can Use P2P Loans?
Anyone with a good credit history can use P2P loans to access lower interest rates than they would typically receive from a bank.
How Do Business Owners Use P2P Lending?
P2P lending is also a good choice for business owners wanting to borrow money.
The process is substantially quicker than applying through a bank; you might get the money in a week after approval.
How Do Investors and Lenders Use P2P Lending?
Investors who participate in peer-to-peer lending have some spare cash they’re willing to loan.
The investor will receive interest on the loan payments in exchange. They will register for a P2P lending platform to get going.
When the borrower makes payments, there is a small percentage of added interest. Between the internet rates and collateral, lenders feel confident in their ability to get their money back from borrowers.