Peer to peer (P2P) lending platforms can let small businesses safely and directly borrow from individual investors and small institutions. That potentially means access to quicker funds, higher approval odds, and better terms than you might get from a traditional bank.
What is P2P Lending?
The days of traditional banks and financial institutions being the only source for small business loans are over. P2P lending platforms serve as matchmakers between small businesses and individual investors, creating a new marketplace for loans for a wide range of business sizes and needs.
This article will explore how peer-to-peer loans work for businesses, the "watch-outs" of P2P lending, and what you need to apply for and qualify for a P2P loan.
We will also tell you what you need to know about three of the top peer-to-peer lenders for small businesses (LendingClub, Prosper, and Funding Circle) and provide some alternatives for you to consider. After reading this article, you will be more informed about P2P lending and have a good sense of whether one of our top lenders might fit your needs.
What To Know About How Peer-to-Peer Business Loans Compare
How They Work
First things first, let's break down how P2P lending actually works. In short, small business borrowers submit an application and request a specific amount of money through an online platform. Investors, who can be individuals or small institutions, then have the opportunity to review the applications and fund the loans. (Because peer-to-peer lending lets individuals or peers act as lenders, it's sometimes also called "social lending.")
The P2P lending platform is the facilitator, connecting borrowers with investors and also assessing the creditworthiness of anyone who wants to borrow money. This approach can be a "win" for everyone involved: investors can diversify their portfolios by lending, P2P platforms get a cut of each deal, and small businesses can get access to loans and terms they otherwise may not have.
Investors on the P2P lending platforms may be more willing to work with borrowers with less established credit histories and lower credit scores. This can be extremely important for small businesses still in the early stages of development or those that have gone through financial hardship and are trying to recover. However, they may charge higher fees and interest rates for borrowers whom they deem to be higher risk.
By eliminating the need for traditional financial institutions, this lending opens up opportunities for small companies that could have difficulty qualifying for loans through traditional channels. And because P2P lenders may have different and less strict criteria than traditional banks, the process is often simpler and faster than a standard loan.
P2P Lending Vs. Traditional Lending
In traditional lending, borrowers typically apply for a loan from a bank or a credit union. The application process involves the borrower providing detailed financial information, and the bank typically adopts a more strict, "one size fits all" approach to underwriting and approval.
But P2P lending is different. Since it's focused on connecting borrowers directly with a number of different investors, there can be a wide variety of different risk appetites, approval criteria, and loan terms. This creates the potential for many more options and opportunities than what a single big bank might be willing to offer.
In addition, the application process is often simpler and more streamlined on a P2P platform. Because most peer to peer lenders are newer than traditional banks and 100% digital, much more of the underwriting and review process is automated and instantaneous.
With that said, the same "watch-outs" and considerations for any traditional loan still hold true for P2P loans, too. It's extremely important to read and understand the terms and conditions of P2P loans and compare them with other lending options before making a decision. This helps confirm that you found the best deal and fully understand the total cost of a loan to ensure you do not put your business at risk.
Advantages of Choosing P2P Loans for Your Business
P2P loans offer several great advantages for businesses that need funding. These include quick access to funds, flexible loan terms, and competitive interest rates. Here's how those can really benefit what you are trying to accomplish.
Pro #1: Quick Access to Funds
- Applications can be fully completed online, saving time and reducing paperwork
- P2P lending platforms digitize and automate large portions of the review and approval process, compared to traditional banks which may still have manual portions of the process
- Loans can be fully funded in a matter of days, providing borrowers with faster access to capital
- Borrowers can receive their funds directly into their bank accounts, allowing for quick deployment of capital
P2P lending platforms can often offer borrowers money faster than a traditional lender, making these loans an attractive option for companies looking for immediate financing.
With a simplified application and quick funding, P2P loans can quickly help businesses meet their financial needs.
Pro #2: Flexible Loan Terms
- P2P lending platforms offer a variety of loan terms, allowing borrowers to choose a repayment schedule that works best for them
- Borrowers have the option to select monthly, weekly, or daily payment schedules, depending on their cash flow
- P2P loans often have more flexible repayment options compared to traditional bank loans
- Loan terms can be customized based on the borrower's creditworthiness and risk profile
Another advantage of P2P loans is the flexibility that can be tailored to the borrower's specific needs. That's not something a business can always count on with a traditional lender.
Flexible loan terms benefit companies with fluctuating cash flow or seasonal revenue. With the option to choose repayment schedules that align with their operations, borrowers can manage their loan obligations more easily, helping them stay more financially stable.
Pro #3: Competitive Interest Rates
- P2P lending platforms often offer a wider range and more competitive interest rates compared to traditional banks
- Interest rates are determined based on the borrower's creditworthiness. As with a traditional loan, borrowers with good credit scores may qualify for lower interest rates
- P2P lenders may offer lower interest rates compared to alternative lending options, such as credit cards or personal loans
Competitive interest rates are another important advantage of choosing P2P loans for your business because the interest rate can significantly affect the payment amount.
By offering competitive interest rates, P2P lending platforms give small businesses an opportunity to access financing that's affordable. Lower interest rates can mean big savings over the life of the loan, and that can help you invest in growth and expand operations.
Drawbacks of P2P Business Loans
The good news is that reputable P2P lending platforms are a proven, trustworthy, and legitimate way to access small business funds. However, as with any loan – whether from a traditional bank or individual investor – P2P loans can come with their own set of risks if you do not do your due diligence before signing on the dotted line. Here are two watch-outs to keep in mind.
Con #1: Potential to Overpay
- P2P lending platforms will likely provide you multiple loan offers, so it is important to carefully review, or "comparison shop" the different offers on each platform.
- You are not married to just one P2P lending platform. See if you can prequalify on at least two different platforms to understand whether the offers you are receiving are fair and competitive.
- Look outside peer to peer lending at more traditional lending options, too. While P2P may be the best choice for your needs, the broader your research, the more confident you will be that this is really the case.
It's very simple: you can't know that you're getting the best deal on a loan unless you do some research before making a selection. As with any loan, fees, APR, and interest rates can add up quickly – so it is critical that you find the right-sized loan for your business with the lowest fees and interest rates you qualify for. Keep the following tips in mind:
Understanding how your loan offers stack up against one another is the best way to avoid overpaying on interest rates and fees when there might be been a better deal out there.
Con #2: Misunderstanding Repayment Terms & Costs
- P2P loans may have additional fees, such as origination fees, late payment fees, or prepayment penalties.
- It's important to fully understand the cost of the loan, including any additional fees or charges.
- Reading the fine print can help borrowers avoid unexpected costs or penalties down the line.
Another risk with peer to peer business lending is glossing over the fine print. That can cause you to agree to something that's not right for your business, so you want to take the time to read all your documents before agreeing to the loan.
Taking the time to read and understand the fine print can help you make informed decisions and avoid any potential pitfalls that might come with your P2P loan.
Applying for Peer-to-Peer Business Lending
Before applying for a peer lending business loan, it's important to understand the eligibility criteria and the application process. Here are some key points you'll want to think about before filling out an application.
Assessing Your Creditworthiness
Although P2P lenders may be more willing to lend to a variety of different credit profiles and business types than traditional banks, one thing remains true: you and your business still need to demonstrate some level of creditworthiness. If you know your credit score and understand any issues your company has with its credit profile, you can prepare yourself and your application as well as possible.
- Lenders assess your creditworthiness based on a variety of factors, including your credit score, your business' ability to repay a loan, collateral, financial performance and history
- A higher credit score means a lower risk for lenders, which increases your chances of being approved
- If you have a poor credit history, you may still be eligible for a P2P loan with a higher interest rate
- It's important to review your credit report and correct any errors or negative items before applying for a P2P loan
Understanding your creditworthiness before applying for a P2P loan can help you be more aware of your chances of approval and negotiate better loan terms.
Understanding the Lender Application Process
The application process for a P2P business loan typically involves providing detailed information about your business and its financials. Having that information ready to go can mean moving through the process faster.
- Pre-qualify. It starts with the borrower filling out an online application on the P2P website, including details such as business name, address, contact details, and loan amount requested. There may be a "soft credit check" at this point, which does not impact your credit score. You'll be able to see what kinds of loan sizes and interest rates your company qualifies for based on the information you've provided
- Apply. Next, you'll complete the application process by submitting more documentation, including financial statements, tax returns, legal documents, and business plans. There may also be a "hard credit pull," which will temporarily lower a borrower's credit score by a few points. This is all part of the assessment the P2P platform undertakes to assess the business' creditworthiness.
- Review offers. Once the application is submitted, individual investors browse loan requests on the P2P platform and choose whether to fund them based on their own risk appetite and investment strategies. You will then begin to receive loan offers -- including a loan amount, one-time fees, interest rate, and repayment terms. Review these carefully and then choose the one that best fits your needs
- Receive funds. Once investors fully fund a loan, the loan proceeds are typically wired to your company's bank account within 1 to 3 days of accepting a loan offer
- Repay. Business borrowers then begin making regular payments to repay the loan, including interest. It is important to note that this part of the process will feel the same as a traditional business loan: you do not interact with individual investors, but rather pay the P2P lending platform directly. These repayments are then distributed to your investors, providing them with a return on their investment
Understanding the application process for a P2P business loan can help you prepare the necessary documents and present your business in the best light. Comprehensive and accurate information can also improve your chances of being approved.
Documents for Borrower Application
When applying for a P2P business loan, you'll likely need to show documents to support your application.
Here are some of the documents you might be asked for:
- Financial statements: Profit and loss statements, balance sheets, and cash flow statements.
- Business plan: Outline of your business objectives, strategies, and financial projections.
- Tax returns: Personal and business tax returns for the past few years.
- Bank statements: Statements showing your business's cash flow and financial transactions.
- Legal documents: Business licenses, registrations, and any legal agreements relevant to your business.
These are just a few examples of the documents that might be required for a P2P business loan application, and you could be asked for other documentation or proof of your business's financial status. It's important to review the lending platform you're applying to and gather the documents that platform needs since requirements can differ from one platform to the next.
Top 3 Peer-to-Peer Lending Platforms for Small Businesses
When you're ready to choose a P2P lending platform, there are several options to choose from. Here's what to know about our top three peer-to-peer business loans platforms: LendingClub, Prosper, and Funding Circle.
LendingClub: Best for earlier-stage businesses
LendingClub has established itself as a reliable and popular choice for small companies looking for P2P loans. Some of the reasons it stands out include the flexibility of loan purposes, including expansion, equipment purchase, and working capital. Plus, since it has a wide range of loan options and competitive terms, it's worth considering as a potential source of financing.
LendingClub Fast Facts
- Loan sizes offered: $5,000 to $500,000
- Minimum approval requirements: Roughly 600 credit score. At least 12 months in operation. At least $50,000 in annual sales
- Interest rates: Starting at 5.99%
- Fees: Origination fee. (The specific fee is no longer publicly listed; you must apply to see what your fee would be -- but it previously was a flat 5.99% of total loan amount)
- Repayment terms: 1 year to 5 years
- Lender reviews: 4.7/5 stars on Trustpilot with over 5,300 customer reviews. A+ rating on the Better Business Bureau.
- Standout feature: Lending criteria is among the most flexible available
- Watch-outs: Technically, LendingClub stopped offering P2P business loans a few years ago, and now offers business loans through a reputable financing partner named Accion Opportunity Fund
Prosper: Best for Larger Loan Sizes
Prosper is another prominent P2P lending platform that offers tailored loans for small companies. Technically, they have partnered with another company called BusinessLoans.com to manage their P2P platform, and they are known for offering competitive interest rates, flexible loan terms, and a slick online application process.
Prosper Fast Facts
- Loan sizes offered: $10,000 to $3,000,000
- Minimum approval requirements: Roughly 650 credit score. At least 6 months in operation. At least $100,000 in annual sales
- Interest rates: Starting at 9%
- Fees: Specific fees are not publicly listed; you must apply to see what your fee would be
- Repayment terms: 3 years to 5 years
- Lender reviews: Over 12,400 Trustpilot reviews give Prosper an average score of 4.6/5. The lender also has a Better Business Bureau rating of A+.
- Standout feature: A smooth and straightforward application process makes self-service a breeze
- Watch-outs: More stringent approval requirements may put a Prosper P2P loan out of reach for newer or smaller companies
Funding Circle: Best For Fast Cash
Funding Circle is a P2P lending platform that's already well-known for its focus on small business loans and expansion financing. That can make it an attractive option for your business' plans and goals. With its emphasis on small business loans and a commitment to fast funding, Funding Circle is a great choice for small businesses looking to expand operations or secure some working capital.
Funding Circle Fast Facts
- Loan sizes offered: $25,000 to $500,000
- Minimum approval requirements: 660 credit score or higher. At least 2 years in operation. At least $50,000 in annual sales. No bankruptcies in the past 7 years
- Interest rates: 15.22% to 45%
- Fees: Origination fees from 4.49% to 8.49%. Late fees of 5% of missed payment amount
- Repayment terms: 6 months to 7 years
- Lender reviews: Over 14,600 Trustpilot customer reviews give Funding Circle a 4.6/5 stars. It has a rating of A+ from the Better Business Bureau
- Standout feature: Funding Circle is known as one of the fastest P2P lenders out there - they claim to fund loans as quickly as two days after you first apply
- Watch-outs: Because Funding Circle requires a lien and a personal guarantee, defaulting on payments could create significant financial problems for borrowers
Alternatives to Peer to Peer Business Loans
While P2P loans can be a great financing option for many small businesses, there are some other options to consider. If you have a small business and you're not sure which direction to take, be sure you've looked at additional opportunities for funding. Then, you can feel confident that you're making the right choice.
Home Equity Investment
Home equity investment, or a home equity line of credit (HELOC), is an alternative option for small business financing that involves using the equity in your home to secure a loan.
- This allows homeowners to borrow against the value of their homes by taking out a second mortgage or HELOC.
- The loan amount is determined by the equity in the home, which is the difference between the market value and the mortgage balance.
- This can be a cost-effective option for borrowers with good credit and significant home equity.
- Using a home as collateral carries the risk of foreclosure if you can't make your loan payments.
Home equity investment can give small businesses access to larger loan amounts and potentially lower interest rates, but it can also put your home at risk. You want to carefully consider the risks and benefits before choosing this option.
Online Personal Loans
Personal loans are another alternative for small business financing. As always, approved loan sizes and interest rates will depend on credit scores and other factors.
- Personal loans are unsecured loans that can be used for various purposes, and that includes business expenses.
- Borrowers can get personal loans from banks, credit unions, or online lenders.
- Personal loans generally require good credit and may have higher interest rates.
- The loan amount and terms are based on the borrower's creditworthiness and income.
- Personal loans can provide quick access to funds, but you need to be careful of interest rates and repayment terms.
Personal loans can be a viable option for small business owners who don't have a lot of collateral or don't want to use their homes as security. However, it's important to assess the costs and terms of personal loans before making a decision.
Some of our favorite online lenders include:
- AmONE, a P2P lender for personal loans up to $50,000. Read our full review here.
- SoFi, a highly reputable lender providing loans up to $100,000. Read our full review here.
- Best Egg, a well regarded lender offering up to $35,000 for Fair credit borrowers. Read our full review here.
Business Grants
Business grants are non-repayable funds provided to businesses by governments, corporations, or non-profit organizations. In other words, if you get a grant you don't have to worry about paying back the money you were given.
- Business grants are typically awarded based on specific criteria, such as industry, location, or business type.
- Grant funding can be used for many purposes, including business expansion, research and development, or community initiatives.
- Applying for business grants requires a detailed proposal outlining the project and demonstrating how it aligns with the grant.
- Business grants can provide financial support without the need for repayment, but competition for grants is strong.
- Small businesses can research and identify grant opportunities and follow application guidelines to increase their chances.
Business grants can help fund your small business, particularly if it's focused on innovative projects or community development. However, securing grants can be a very competitive and time-consuming process, so you'll need to be prepared to invest plenty of time and effort into your application.
Loan Options For Established Businesses
Established businesses often have access to additional financing options beyond P2P loans. Since they've been around for a while, they can have stronger credit histories and a solid financial standing.
- Traditional bank loans: Established businesses with a good credit history may qualify for traditional bank loans with favorable interest rates and terms.
- Credit cards: Business credit cards can offer a convenient source of financing for day-to-day expenses, but be sure to use them responsibly to avoid high-interest charges.
- Business lines of credit: A business line of credit allows your business to access funds as needed, and that provides flexibility and financial security.
- Equipment financing: Businesses in need of specific equipment can look into equipment financing options, allowing them to spread the cost over time.
- Invoice factoring: Businesses that have outstanding invoices can use invoice factoring to access funds right away, by selling those invoices to a third party.
Established businesses may want to explore these alternative loan options and choose the one that suits their financial needs and long-term goals.
The Bottom Line
- Peer to peer business loans offer quick access to funds, flexible loan terms, and competitive interest rates compared to traditional lending.
- Understanding the application process, assessing creditworthiness, and preparing necessary documents are crucial steps before applying for a P2P business loan.
- Consider P2P loans as a viable option for your business financing needs while exploring alternatives like home equity investments, personal loans, and business grants.
- P2P lending isn't right for every business, but it may be the right choice or yours. Take your time and do your research so you can make the best financial decisions for your business.
Frequently Asked Questions
What Are the Eligibility Criteria for a P2P Business Loan?
The eligibility criteria for peer to peer business loans varies depending on the lending platform. Overall, lenders look at factors like your credit score, business revenue, and financial stability when deciding on a loan application.
How Long Does the Funding Process Take?
The funding process for a P2P business loan may take just a few days, or it could take a couple of weeks. It depends on the lending platform and the complexity of the loan, along with your risk profile.
Can I Prepay My Loan Without Penalties?
Each P2P lending platform has its own policies for prepayment penalties. Some platforms let borrowers prepay their loans without penalties, while others might charge a fee for early repayment. Reviewing the terms and conditions of the loan before proceeding is the right choice.
