What is peer-to-peer lending and how does it work?
- P2P lending allows you to borrow directly from individual investors, bypassing banks or credit unions.
- The process is quick and streamlined, and you are likely to receive funds much faster than through a bank.
- P2P is a good option for borrowers who cannot 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 take out a loan, your first instinct is probably to apply for it at a bank or a credit union. It’s certainly a valid option, but borrowers today have lending options far beyond what a traditional bank or credit union can offer.
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For example, peer-to-peer (P2P) loans allow investors to work directly with an individual or business seeking a loan. P2P loans often come with surprisingly low rates and a transparent application process.
But what is P2P lending and is it a good option for small business owners? This article will explain what P2P lending is so that you can decide if it is right for your business.
What is the P2P loan?
P2P lending eliminates the 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 due to the benefits it offers to both borrower and investor.
P2P loans are often a good option for borrowers with bad credit who would not qualify for a loan from a bank. This allows them to access the financing they need without having to turn to predatory payday lenders.
P2P loan is also a good option for business owners looking to take out a loan. The process is much faster than applying through a bank, and you could receive the funds within a week of approval.
How does the P2P loan work?
In P2P loans, an investor has extra money that he is willing to lend. In return, the investor will receive interest on the loan payments. For starters, they will sign up for a P2P lending platform like Prosper or LendingClub.
These marketplaces connect investors with borrowers who wish to take out a loan. Once the borrower applies for a loan, they fill out some basic information just like they would for a traditional loan.
Most of the financial products offered are personal loans, although the lender can define their own criteria. For example, some lenders will provide loans specifically for debt consolidation. [Related: Tools to Help Manage Business Finances]
Once the borrower has completed the application, the lender will check their credit score and decide whether to approve them for the loan. Once the borrower is approved, the lender will fund the loan.
Benefits of P2P loan for businesses
For businesses, P2P loans allow them to find the financing they need without going through a bank. Let’s take a look at some of the main pros and cons of P2P loans.
- Simplified application process: The most important advantage of the P2P loan is the ease of the application process. Businesses will have to deal with much less paperwork and you will know if your application is approved or denied almost immediately.
- Low prices: P2P loans come with surprisingly low rates, as individual investors don’t have to pay the same overhead costs as banks. Of course, you should always do your homework to make sure you get the best deal possible.
- Options for imperfect credit: Every time you apply for a loan, the higher your credit score, the better. But with P2P loan, imperfect credit won’t necessarily exclude you from loan approval.
- Quick financing: Once you are approved for a P2P loan, you should receive the funds within a week. However, some markets promise funding in as little as three days.
- Costs: Although you can benefit from a low interest rate, P2P loans often come with additional fees. For example, some lenders will 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.
- High prices: One of the advantages of P2P lending sites is that excellent credit is not required to qualify. But if your credit is low, you may end up with high rates and unfavorable repayment terms.
P2P sites for businesses
P2P markets have grown significantly in recent years, so it can be difficult to know where to look first. If you are looking to take out a P2P loan, here are the top four options for small businesses.
1. Fundraising circle
Funding Circle offers small business loans between $ 25,000 and $ 500,000 with terms ranging from three months to 10 years. You will receive a loan decision within 24 hours, and once you are approved, you will receive the funds within three days.
You will need excellent credit to qualify for a loan through Funding Circle. But initially, the company will slowly draw on your credit, so there really is no downside to applying.
StreetShares offers P2P loans specially designed for small businesses with strong cash flow. Loans range from $ 2,000 to $ 100,000 with terms ranging from three months to three years.
Once your application is approved, you will receive the funds almost immediately. And there are no prepayment penalties, but you will need to make weekly payments.
3. Loan club
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 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 who are struggling to get loan approval from a traditional lender.
Upstart offers loans between $ 1,000 and $ 50,000 to people looking to start or grow a business. You will make monthly loan repayments over a repayment term of three to five years. Upstart does not charge a prepayment penalty, but does charge a one-time creation fee.
Upstart is a great option for borrowers looking to start a new business idea. The company prides itself on considering a borrower’s potential and has tons of positive reviews. [Related: Small Business Guide to Getting a Loan]
Other types of loans available with the P2P loan
Personal loans are not the only option in P2P loans. Here are some of the other loan options available to businesses and consumers:
- Small business loans
- Debt consolidation
- Student loans
- Auto loans
- Automatic refinancing
- Medical fees
What can I use a P2P loan for?
Generally, you can use a P2P loan for any purpose you choose. You can use the money to finance expenses for a small business, consolidate debt, or pay for an upcoming trip.
The only exception is if your lender places certain limits on the use of funds. For example, some lenders offer P2P loans specifically for debt consolidation. Another example, if you take out a business loan, you may not be able to use that money for personal expenses.
What are the risks of the P2P loan?
The investor assumes most of the risks associated with P2P loans. Whenever an investor lends money, they may not be able to recover the funds or, if the P2P market suddenly closes, they may be unable to recover their investments.
But there are also risks for the borrower. For businesses with bad credit, you may not qualify for the best rates and terms on your loan. While you have access to the financing you need, you could end up paying a lot of money in interest.
How to apply for a P2P loan?
If you want to take out a P2P loan, your first step is to find a loan market. Look for sites that have a reputation for trustworthiness and a history of good customer reviews. It’s also a good idea to see how this business is rated by the Better Business Bureau.
Once you have chosen a marketplace, you will begin the application process. You will start by indicating the amount of money you want to borrow and the purpose of the loan. From there, you’ll enter your personal information and accept a credit check.
Once you’ve been approved for a loan, you can review your interest rate, repayment terms, and any additional loan terms. If you agree to the terms, you will move 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 you have received the funds, you will proceed to the reimbursement step. At this point, you will start making weekly or monthly payments to pay off the loan.
The basics on P2P loans
If you are looking to take out a small business loan and hope to avoid the headache of applying to a traditional lender, P2P loan is a good alternative. P2P loans eliminate financial intermediaries and allow you to borrow money directly from individual investors.
If you have an excellent credit history, you may be eligible for a low interest rate. However, borrowers with poor credit are not excluded from the application.
Once you are approved for a loan, be sure to do your due diligence. Compare the offers of several lenders and make sure that the loan is worth what you will pay.