Peer-to-peer lending: P2P on the touch screen with a blur background of the businessman with the phone.
By: rkapur
Read in 13 minutes

What Is Peer-To-Peer Lending?

When your small business requires funds to purchase new equipment or buy inventory, your first instinct could be to apply for a loan to a bank. What if there was an alternative way to raise funds — one that involves borrowing directly from an individual? That’s precisely the service that peer-to-peer lending aims to provide.

A peer-to-peer lender doesn’t deploy its own funds. Instead, it matches individual lenders with borrowers who need a loan. Let’s examine how peer-to-peer lending works in greater detail.

What Is Peer-to-Peer Lending? How Does Peer-to-Peer Lending Work?

Peer-to-peer lending is also known as “social lending,” “crowdlending,” or as P2P lending. It works by removing banks and large financial institutions from the lending process. Borrowers gain access to individuals who want to invest their money through the P2P lender’s website.

Here’s an illustration that shows how the process works:

Peer-to-peer lending process

Source – CFI

Steps to Apply for a Peer-to-Peer Loan

How can a small business borrower raise money through a P2P company? These are the steps that you need to follow:

  1. Select a peer-to-peer lender and go to its website.
  2. Create an account. At this stage, you would probably have to authorize a credit check.
  3. Submit the details of the loan that you are looking for. How will you use the money? What is the sum that you want?
  4. Registered lenders will have the opportunity to view the details you have provided and decide if they are willing to advance funds to you.
  5. If your request is approved, you will receive money directly in your bank account.

P2P lenders charge borrowers a fee for the service they provide. They make money from investors, too.

Other Features of Peer-to-Peer Lending

Here’s a quick summary of the main features of peer-to-peer lending:

Online process – A P2P lender can be accessed through its website. Getting a loan doesn’t involve visiting the lender’s office.

Usage of funds – you can access various types of loans through a peer-to-peer lender’s website. Funds can be raised for your business, to pay off high-cost credit card debt, or even for medical expenses.

How much can you borrow? Each P2P company sets a maximum limit. Lending Club, a prominent P2P lender, offers small business loans ranging from $5,000 to $500,000.

Who provides the borrower with funds? In every instance, it’s an individual and not the P2P company.

Do borrowers have to provide collateral? It depends. Some peer-to-peer lenders require you to provide collateral for loans that exceed a specific limit.

How much does it cost? APRs could range from 10% to 36% or more. You will also have to pay an origination fee that could be between 1% and 8% of the amount that you are borrowing.

What is the repayment term? This could range from 6 months to 5 years.

A peer-to-peer lending service connects lenders and borrowers online

Pros and Cons of Peer-to-Peer Lending

Borrowing from a P2P lender offers several advantages to small businesses that require funds. It can be quick, the process is transparent, and it is possible to raise money at low rates of interest.

However, there are disadvantages, as well. A low credit score could mean paying a high APR. You may even be unable to find anyone willing to lend to you.

Here’s a comprehensive list of the pros and cons of P2P loans:

Pros Cons

An online application can be made easily


Borrowers with poor credit could have to pay high rates of interest


It is possible to borrow at a low rate


Origination fees add to your cost of borrowing


Most P2P lenders don’t require collateral


If you have a poor credit score, you may not be able to raise a loan


Flexible repayment term – up to 5 years


Delaying payments could affect your credit score


If you make repayments on time, you can borrow additional sums

You may not be able to raise the amount that you need

Most loans don’t carry a prepayment penalty


You can be the victim of a scam if you don’t deal with a trusted P2P website*


It’s less complicated than borrowing from a bank


*How does a P2P scam work? You would get an email offering you a P2P loan at a low rate of interest. But you would be required to make an advance payment first. After you pay the fees, you wouldn’t hear from the lender again.

In What Scenarios Should You Consider Peer-to-Peer Lending?

Should a small business owner borrow from a peer-to-peer lender? Or is it better to approach a traditional source like a bank or a credit union?

The answer to these questions depends upon several factors. If you need money quickly, a P2P lender could be the right choice. The application process is quick and straightforward. Entrepreneurs who have poor credit could also try their luck with a peer-to-peer lender. While there’s no guarantee of success, it’s entirely possible that you may be able to raise the funds that you need.

P2P loans can also help if you have a large sum outstanding on your credit card. Instead of paying the credit card issuer a high rate of interest, you could take a loan that carries a lower APR through a P2P lender and pay off your debt. This would enable you to save on interest costs.

Best Peer-to-Peer Lenders

What is the best peer-to-peer lending site?

Here’s a table that provides details about five leading P2P lenders. You can use it to compare the terms they offer.

Lending Club
Prosper Upstart Funding Circle
Type of loan offered
Business loans, as well as other types of loans Small business loans, as well as other categories Business loans and several other categories Small business loans Personal loans and debt consolidation
Loan amount
$5,000 to $500,000 $2,000 to $40,000 $1,000 to $50,000 $25,000 to $500,000 $4,000 to $25,000
9.77% to 35.98% Entre 5.31% y 35.99% Entre 4.68% y 35.99% Entre 4.99% y 22.99% Entre 5.99% y 29.99%
Basic requirements
12 or more months in business, at least $50,000 in annual sales Tax returns, bank statements, paystubs. A minimum FICO or Vantage score of 620 Business and personal tax returns, bank statements, and business debt information Your personal details and a government-issued ID
Funding time
Within 7 days of approval Within 5 days of accepting the loan offer Within 1 or 2 days of approval Within 5 days of approval Approval and funding time could vary
Loan origination fee (as a percentage of the loan amount) 3.49% to 7.99%  2.4% to 5%  0% to 8%  3.49% to 6.99% 1% to 5% (included in APR)

FAQs on Peer-to-Peer Lending from the Point of View of the Investor

If you are not a borrower, but an investor considering lending money in a peer-to-peer platform, these are some questions that may pop into your head:

Can you make money with peer-to-peer lending? Yes, it is possible to make money P2P lending. It can be a great portfolio diversifier if you already have invested in stocks or bonds. As an investor, it can earn you a higher yield than most other fixed-income alternatives.

Is peer-to-peer lending safe as an investor? Yes, P2P lending is a safe way to invest your money, but make sure to always use trusted platforms. Also, as it happens with any type of investment, try not to put all your eggs in one basket. Diversify your investments. In other words, don’t lend all your money to one borrower.

Other Options to Get a Business Loan

There are other ways for small businesses to access capital. One popular option is Crowdfunding. This involves raising small amounts from a large number of people. Companies like Kickstarter and Indiegogo can provide an alternative method for raising capital. Crowdfunding can be especially useful if you are planning to launch a new venture.

If you are attracted to peer-to-peer lending because it involves raising funds from an individual instead of a large institution, you may also consider borrowing money from family and friends, but be aware that the informality involved in this choice can lead to a tense situation. Learn here how to borrow from family and friends the right way.

Learn here about other alternatives to a business loan

Another excellent option that is available to small business owners is to approach an online alternative lender. These are companies that offer loans through an online application process. If you are planning to raise funds, you could consider applying to Camino Financial for a small business loan.

Camino Financial’s website allows you to get a business loan quote and check instantly if you prequalify. Making an application won’t affect your credit, and once you are pre-approved, you can receive your funds within 4 to 10 business days.

You may find it useful to compare Peer-to-peer lending vs. Small business loans. In most instances, a small business loan from Camino Financial is a clear winner. Here are some of the advantages that Camino Financial offers:

⇨ Our motto is “No business left behind.” You don’t need a minimum credit (FICO) score to apply. Even applicants without a credit history could be eligible for a loan from us.

⇨ Minimum requirements: Your business must have been operating for at least 9 months and earn $30,000 in annual gross sales. Applicants with ITIN only are accepted.

⇨ We offer small business loans (maximum $400,000) at annual interest rates ranging from 12% to 24.75%. Our microloans (maximum $75,000) are available at rates from 19% to 34%.

⇨ No collateral is required.

⇨ A Camino Financial loan specialist will guide you through the borrowing process and ensure that you are matched with the best financing solution according to your circumstances and that you get the best possible terms.

The Bottom Line

A peer-to-peer loan can be a good idea for some businesses. If you have poor credit or want to explore a new borrowing option, it’s worth a try.

However, for most entrepreneurs, a small business loan from Camino Financial could be the best choice. See if you prequalify. It takes just a minute and may mean a significant amount of savings in the long term.


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