Guide

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

What Is Peer-to-Peer Lending and How Does It Work?
Written by Publishing Team

  • P2P lending allows you to borrow directly from individual investors, bypassing banks or credit unions.
  • The process is quick and simplified, and you are likely to receive money much more quickly than receiving it through a bank.
  • P2P is a good option for borrowers who may not qualify for a traditional loan. If your credit is good, you can get a surprisingly low rate.
  • This article is for business owners who want to know the pros and cons of P2P lending as well as how and where to apply.

If you are looking to get a loan, your first instinct is probably to apply for a loan with a bank or credit union. This is certainly a valid option, but today, borrowers have lending options that go far beyond what a traditional bank or credit union can offer.

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For example, peer-to-peer (P2P) lending allows investors to work directly with an individual or company looking to obtain a loan. P2P loans often come with surprisingly low rates and a smooth application process.

But what is P2P lending, and is it a good option for small business owners? This article explains what P2P lending is so you can decide if it’s right for your business.

What is P2P Lending?

P2P lending interrupts a bank or financial institution and allows individual investors to lend money to individuals and businesses. P2P lending has become a popular alternative form of lending thanks to the advantages it offers to both the borrower and the investor.

P2P lending is often a good option for borrowers with bad credit who do not qualify for a loan through a bank. It gives them access to the financing they need without having to turn to predatory payday lenders.

P2P lending is also a good option for business owners who are looking to get a loan. This process is much faster than applying through the bank, and you can receive money within a week of approval.

How does P2P lending work?

In P2P lending, the investor has some extra money that he is willing to lend. In return, the investor will earn interest on the loan payments. To get started, they will sign up for a P2P lending platform like Prosper or LendingClub.

These markets match investors with borrowers looking to get a loan. Once the borrower applies for a loan, they will fill in 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 example, some lenders will offer loans specifically geared toward debt consolidation. [Read related article: Tools to Help Manage Business Finances]

After the borrower fills out the application, the lender will check his credit score and decide whether to approve it for the loan. Once the borrower is approved, the lender will finance the loan.

Benefits of P2P Lending for Businesses

For businesses, P2P lending allows them to search for the financing they need without applying through a bank. Let’s take a look at some of the biggest pros and cons of P2P lending.

Positives

  • Simplified application process: The most important feature of P2P lending is the easy application process. Companies will have to deal with fewer paperwork, and you’ll know if your application has been approved or rejected almost immediately.
  • Low rates: P2P lending comes at surprisingly low rates because individual investors do not have to pay the same overheads as banks. Of course, you should always do your homework to ensure that you get the best deal possible.
  • Incomplete Credit Options: The sooner you apply for a loan, the higher your credit score, the better. But with P2P lending, incomplete credit will not necessarily disqualify you from loan approval.
  • Quick Financing: Once the P2P loan is approved, you should receive the funds within a week. However, some markets promise funding in as little as three days.

Negatives

  • Outlay: Although you may receive a lower interest rate, P2P loans often have additional fees. For example, some lenders may charge an origination fee of between 1% and 8% of the total loan amount. Make sure you read the fine print before accepting the loan.
  • A high degree: One of the advantages of P2P lending sites is that excellent credit is not necessary to qualify. But if you have poor credit, you may get stuck with high rates and unfavorable repayment terms.

P2P sites for businesses

P2P markets have grown exponentially in recent years, so it can be difficult to know where to look first. If you are interested in getting a P2P loan, here are the four best options for small businesses.

1. Department of Finance

Funding Circle offers small business loans ranging from $25,000 to $500,000 with terms ranging from three months to 10 years. You will receive a decision on the loan within 24 hours, and once approved, you will receive the funds within three days.

You will need excellent credit to qualify for a loan through Funding Circle. But at first, the company will pull your credit lightly, so there’s really no downside to applying.

2. Street Sharing

StreetShares offers P2P loans designed specifically for small businesses with strong cash flow. Loans range from $2,000 to $100,000, and terms range from three months to three years.

Once your application is approved, you will receive the funds almost immediately. And there are no penalties for prepayment, but you will have to make weekly payments.

3. LendingClub

LendingClub offers business loans from $5,000 to $500,000 with repayment terms ranging from one to five years. The company connects businesses to a network of lenders through its partnership with the Accion Opportunity Fund.

When you are ready to apply, you will be assigned a dedicated client advisor who will guide you through the application process. LendingClub is a good option for businesses that find it difficult to get approved for a loan from a traditional lender.

4. cocky

Upstart offers loans ranging from $1,000 to $50,000 to individuals looking to start or expand a business. You will repay the loan installments monthly over the repayment period of three to five years. Upstart does not charge a prepayment penalty, but it does charge a one-time setup fee.

Upstart is an excellent option for borrowers looking to get a new business idea. The company prides itself on looking at the potential of the borrower and has a lot of positive reviews. [Read related article: Small Business Guide to Getting a Loan]

Other types of loans available with P2P Lending

Personal loans are not the only option in P2P lending. Here are some other loan options available to businesses and consumers:

  • Small Business Loans
  • monotheism
  • Mortgages
  • student loans
  • car loans
  • Auto Refinance
  • medical expenses

Frequently Asked Questions About P2P

What can I use a P2P loan for?

In general, you can use a P2P loan for any purpose you choose. You can use the money to fund small business expenses, consolidate debt, or pay for an upcoming trip.

The only exception is if the lender places certain limits on what you can use the money for. For example, some lenders offer P2P loans specifically aimed at debt consolidation. As another example, if you take out a business loan, you may not be able to use this money for personal expenses.

What are the risks of P2P lending?

The investor bears most of the risks involved in P2P lending. Every time an investor lends money, there is a chance that they won’t be able to get the money back, or if the P2P market suddenly shuts down, they may not be able to get their investment back.

But there are risks to the borrower, too. For companies with bad credit, you may not qualify for the best rates and terms on your loan. Although you will get access to the financing you need, you may end up paying a lot of money with interest.

How do I apply for a P2P loan?

If you are interested in getting a P2P loan, your first step is to find a market to lend. Look for sites that are known for being trustworthy and have a track record of good customer reviews. It’s also a good idea to see how this business has been rated by the Better Business Bureau.

Once you have selected a market, the application process will begin. You will begin by determining the amount of money you are looking to borrow and the purpose of the loan. From there, you’ll enter your personal information and agree to a credit check.

After the loan is approved, you can review the interest rate, repayment terms and any additional terms of the loan. If you agree to the terms, you will take the loan to the financing stage.

During the funding phase, potential investors will review your application and decide whether or not to fund the loan. Once the funds are received, you will proceed to the payment stage. At this point, you will start making weekly or monthly installments to pay off the loan.

The bottom line on P2P Lending

If you are looking to get a small business loan and are hoping to avoid the headache of applying with a traditional lender, P2P lending is a good alternative. P2P lending eliminates the financial intermediary and allows you to borrow money directly from individual investors.

If you have an excellent credit history, you can qualify for a lower interest rate. However, borrowers with poor credit are not excluded from applying.

Once the loan is approved, perform your due diligence. Compare offers from several lenders, and be sure that the loan is worth what you will pay.

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