A peer to peer business loan might be a viable option for business owners who need a loan to buy inventory, expand operations or purchase equipment. The requirements to qualify for a peer to peer business loan are often more relaxed than those for traditional lenders. Peer to peer lending allows people to use each other as a resource for loans, bypassing more conventional forms of funding. It also serves investors as an alternative way to grow their money. Let’s explore the peer to peer lending system and learn if it’s a good option for funding your small business.
What Is a Peer to Peer Loan?
Peer to peer business lending connects borrowers with lenders instead of using a big bank or lending institution as a source of funding. Investors might include any individual or institution that wants to invest in new and growing businesses. The peer to peer system allows lenders to invest in loans they feel are a reasonable risk.
Peer to peer lending is a newer concept in the world of finance. Prosper, launched in San Francisco in 2006, was the first American peer to peer lending company. The concept grew quickly during the 2008 financial crisis when many small companies could not access the funds they needed. During that time, peer to peer lending also seemed less risky than the stock market for investors.
The peer to peer lending structure benefits both the borrower and the lender by allowing lenders to decide which criteria they require. Borrowers who don’t qualify for traditional funding might have success on a peer to peer lending platform.
Peer to Peer Business Lenders
Peer to peer business lenders have the potential to make a good return on their investments. Like other investments, with peer to peer loans, investors find security in diversification.
A peer to peer business lender invests in a specific business. They use a platform such as Funding Circle or StreetShares that allow investments in business loans, or fractions of those loans. The platform handles the application process and then publishes information about the business, the amount of money they want to borrow, their credit and their overall financial health. Investors can choose to lend all or a portion of the funds. For lenders, peer to peer business loans might be a lucrative investment option.
Is a Peer to Peer Business Loan Right For You?
Although some peer to peer lenders use non-traditional criteria to qualify borrowers, credit is still a factor when it comes to getting access to funds via peer to peer lending. Business owners might not be able to get a business loan if they don’t have an established banking and credit history, which means they’ll need to rely on their personal credit scores to qualify.
Peer to peer loans with bad credit might not work for businesses because of their high costs. With good credit, peer to peer loan rates could be even lower than with traditional lending institutions.
Every peer to peer lender has its own credit requirements — and although credit may not be the deciding factor — having FICO credit scores below 600 could disqualify applicants with some peer-to-peer lenders. Other lenders, such as Peerform, might approve applicants with credit scores as low as 600.
PersonalLoans.com is a platform providing all types of loans — including peer-to-peer loans — to applicants with any credit score if they meet income requirements.
Lending Club is another peer to peer lending platform with its own qualification requirements. They assign each applicant a grade from A to G, with A representing the least amount of risk to the lender. Lending Club applicants with higher grades receive lower interest rates and fewer fees than applicants with lower grades.
Funding Circle has a minimum credit score requirement of 620. You’ll need a credit score of at least 600 to qualify for a StreetShares loan.
Loan terms typically range from 12 to 60 months. Peer to peer business lending platforms have minimum and maximum loan limits as well. Your credit score, time in business and ability to repay the loan will help determine how much you can borrow and your interest rate.
Pros of a Peer to Peer Business Loan
Borrowers might be able to access funds with peer to peer lending that they could not otherwise qualify for with traditional financing. A peer to peer loan might offer better terms — including a lower interest rate or more flexible repayment conditions — than a bank loan.
The application and approval process with a peer to peer business loan could also be faster than with a traditional lender. You might be able to get approval within a day, depending on the amount of money you want to borrow and whether you’re able to quickly complete the application. Even if funding takes a few days, the process is generally easier on a peer to peer lending platform than with a bank.
Although peer to peer business loans still lean heavily on credit information for approval, applicants with small credit issues that prevent them from getting traditional financing could still succeed with a peer to peer business loan.
Cons of a Peer to Peer Business Loan
Without a good credit history, peer to peer loans could be just as expensive as traditional business loans. While peer to peer business loans might have alternative criteria that don’t place as much importance on credit scores, past payment history is still a factor in the approval process.
Peer to peer loans could have additional fees that increase the total cost of accessing the funds. Be sure to figure in the costs of any applicable origination fees as well as interest when deciding whether you can afford a peer to peer business loan. Origination fees could range from 1% to 5% of the total loan amount. You might also have to pay loan closing fees ranging from .05% to 5%. Prepayment fees guarantee that the lender receives the full amount of the interest, even if you decide to pay off the loan early. Some peer to peer business loans could have all three of these fees written into the contract, so be sure to read the fine print before agreeing to the loan.
Peer to peer lending removes some of the security banks enjoy when they lend to businesses. Lenders who invest in peer to peer business loans risk losing their money if the loan defaults. For this reason, peer to peer business loans could be more expensive than traditional loans from banks or online lenders.
How to Apply for a Peer to Peer Loan
Applying for a peer to peer business loan online is a fairly straightforward process. You’ll be able to see if you can get preapproved and you’ll have the chance to look over your rates and fees. If you want to proceed, you’ll fill out a formal application and grant the platform permission to access your personal and/or business credit files.
Peer to peer business loans require the same general information as a traditional business loan. You’ll need to provide information about your personal identity as well as information about your business. Annual revenue, amount of time in business and your credit risk score all help a lender decide if you qualify and what fees and the interest rate they’ll charge to access the loan funds.
After you are approved and you agree to the loan terms, you’ll receive funds via direct deposit into your business bank account.