4 Peer-to-Peer Business Lending Options for Small Businesses

There’s a fairly standard process for getting a traditional loan: you approach a bank, fill out an application requesting a specific amount of money, explain your business and its financials, submit documentation, and have the bank accept or reject your application. The bank acts as a gatekeeper and if your application is rejected, your only option is to submit an application to another bank.

What if there were no gatekeepers? What if anyone could lend money to your small business? That’s the idea behind peer-to-peer (P2P) lending –– any investor can act as the bank and they can pool their resources and risks associated with loaning out money. In the post, we’ll look at how P2P business loans work, which providers are the best for your situation, and alternatives to the P2P loan system.

What is a P2P Business Loan?

When broken down to the basics, peer-to-peer lending platforms simply put borrowers in touch with investors; the idea is to get rid of the banks as gatekeepers. With a peer-to-peer loan, a borrower makes a request for a specific amount of money and investors vie for the chance to lend them that money. 

Now that doesn’t mean it’s a free-for-all, with borrowers directly soliciting investors for loans. Instead, the P2P provider takes over some of the bank’s role by assessing creditworthiness and setting interest rates. However, the provider isn’t risking any of its own money, it’s only facilitating a transaction between borrowers and investors. 

Unlike banks, peer-to-peer investors may be more risk-tolerant and willing to deal in smaller value loans. These are just a few of the reasons P2P loans can be the perfect solution for small businesses that are having trouble getting a loan from a traditional bank.

How P2P Lending Works

P2P loans are fairly straightforward –– you ask for money and investors give it to you, then you pay those investors back over time. It’s not all that different from how you’d interact with a bank lending you money. There are a few differences though, so let’s walk through the process of getting a peer-to-peer business loan.

Getting Approved

Typically, a P2P lending platform will have borrowers fill out an application with questions regarding their creditworthiness, their business’s finances, and how they’ll use the loan. Based on these factors the platform will assign the borrower a risk category with a certain interest rate and repayment terms. Then the platform will solicit investors to fund the loan; once funded, the platform will disburse the money and receive payment from the borrower to pay back the investors.

Repayment Period

Peer-to-peer loans run the gamut for how long a borrower has to repay them. Some are just a few months while others are several years. The payment schedule can be daily, weekly, or monthly –– it all depends on the contract agreed upon by the lender and borrower.

Interest Rates

As with a traditional bank loan, interest rates on peer-to-peer lending are determined by the borrower’s creditworthiness. Interest rates range from 6% to 40%, but most peer-to-peer lenders also charge an origination fee, which can be up to 8% of the loan balance.

Credit Check

The peer-to-peer provider will do a hard credit check on you, just as a bank would to assess your creditworthiness. A lower credit score doesn’t necessarily prevent you from getting approval, though the interest rate will get higher.

Business Characteristics

The provider will also want to know a little bit about your business’s financials –– revenue, debts, etc. Knowing how much your business brings in each month will help the provider determine your payment schedule and amounts.

Best Peer-to-Peer Business Lending Options

Every peer-to-peer lender offers something different, so if you want the best interest rates or the most flexible repayment options, it pays to shop around. These are some of the most popular peer-to-peer business lending providers and what they’re known for.

Best Interest Rates – Peerform

For many borrowers, a low-interest rate is a top priority. Peerform has some of the lowest rates starting at 6%. However, borrowers can get loans for $25,000 or less, so it’s not as useful for established small businesses.

Best for Small Businesses – Funding Circle

If you’ve owned your business for at least three years and have a credit score over 660, Funding Circle is an excellent option for P2P lending. Approval and disbursement of funds are fast and you can borrow up to $500,000, which allows you to expand your business now instead of later.

Best for Borrowers with Good Credit – Prosper

Prosper doesn’t charge any prepayment fees and requires no collateral. The repayment period is typically between two and five years, with an interest rate between 8-36%. Their minimum acceptable credit score is 640. 

Best for Borrowers with Bad Credit – Upstart

Upstart will accept applications from borrowers with credit scores as low as 600 but expect to pay for that privilege with higher interest rates and origination fees. However, Upstart will consider your employment and education history for borrowers with limited credit history.

Alternatives To Peer-to-Peer Lending for Small Businesses

Peer-to-peer lending isn’t for everyone and it can be particularly problematic for borrowers with bad credit. It’s not just that the interest rates are higher than with a traditional bank loan, there’s also less protection afforded to you with missed payments. P2P lending platforms will quickly turn you over to debt collection agencies rather than working out a payment plan.

For those needing a small business loan but without the pitfalls of peer-to-peer lending, LendThrive offers loans with low fixed rates from anywhere between $25,000 and $150,000.

If a LendThrive loan sounds right for you, contact us today and see how we can help your business grow alongside your dreams. Apply now.