What is peer to peer lending?
Peer to peer lenders (or P2P lenders) are one of the latest innovations in the FinTech (financial technology) world. They connect small business owners to individuals as investors—similar to crowdfunding. This provides businesses the opportunity to be funded by individuals as opposed to financial institutions.
Investors have their funds spread out over different types of loans. As the businesses pay back their peer to peer loans, the investors make money from the interest paid, typically getting a higher return than other investment opportunities.
Peer to peer lenders are free from the regulatory involvement of banks. Simply put, this means lower interest rates, lower credit score requirements, and less admin work than business loans from traditional banks. But it also means more risk for lenders and borrowers.
How does peer to peer lending work?
Peer to peer loans (or P2P loans) aren’t like personal loans. You aren’t connected with a single person who will be your financier. Instead, the peer to peer lender acts like a middleman and the funds you receive are from multiple investors who want to get involved in business lending. To lower risk for investors, their money is divided into multiple loans. This way, they don’t take as much of a hit if a business defaults on their loan.
For businesses, you work with the lending company. The lending company takes a loan application and determines the borrower’s creditworthiness. Once a borrower’s eligibility is determined, the lender may extend a loan offer.
The business only works with their online lender to make payments.
Who should apply for a P2P loan?
If you’re considering peer to peer lending for your business, know that it isn’t right for everyone. For businesses like early startups that can’t qualify at traditional lenders, a P2P loan is an alternative. Some platforms are more willing to overlook bad credit or no credit history. But peer to peer lending isn’t completely different from traditional lenders. These still come at a cost of higher interest rates and fees.
If you’re considering a loan from a traditional lender and have a good credit score, it’s still worth considering a P2P loan. Easy online applications and the convenient marketplaces lets small business owners compare rates for the best possible deal. Peer to peer platforms offer competitive interest rates and you could find a loan cheaper than what banks have available.
What are the loan terms of a P2P loan?
Peer to peer lenders aren’t like the expensive traditional banks with high overhead costs. These lower costs can mean better rates than your typical small business loans.
For small businesses, you have access to a wide range of loan amounts. Some providers like LendingClub offer loans of up to $500,000. Or you can take a smaller amount for short-term financing.
Payment terms range anywhere from 6 months to 5 years, typically with no prepayment penalty. The interest rate (or APR) will depend on your credit score but can be as low as 5.99%.
Some lending platforms make their money from loan fees making them more costly upfront than traditional banks. Origination fees range from 1-10% which can mean hefty fees for larger loan amounts.
While seeming like the hot new lending option, peer to peer lending for a business works similarly to traditional small business loans. Each platform offers something different and it’s worth shopping around to find the cheapest loan that best suits your business. Pursuing peer to peer lending for a business isn’t the secret recipe for better loan terms, but is another opportunity to get the best terms on the market.
How Bench can help
Once your business has a loan, making payments is just one part of the process. Loan payments need to be accurately recorded for tax purposes and you should always be aware of the remaining balance. A Bench bookkeeper can handle both of these tasks and provide important cash flow information so you can confidently make the next payment. Learn more.
Where can I get a P2P loan?
There are a wide range of online platforms you can pursue a peer to peer loan from. Below are four highlights from the lending marketplace. The listings below are not endorsed by Bench and should only be used for informational purposes.
|Provider||Interest rates||Payment Terms||Loan Amounts|
|LendingClub||10.68%-35.89%||3 to 5 years||$5,000 to $500,000|
|Funding Circle||11.29%-30.12%||6 months to 5 years||$25,000 to $500,000|
|Upstart||7.98%-35.99%||3 to 5 years||$1,000 to $50,000|
|Peerform||5.99%-29.99%||3 to 5 years||$4,000 to $25,000|
How to get a P2P loan
To shop around, create a borrower profile on multiple P2P lending platforms. This will maximize the offers made to you allowing you to shop for the best loan terms.
Be prepared to provide the following information to create a borrower profile:
- Your business name
- The legal structure
- The number of employees
- Your Taxpayer (or Employer) Identification Number (EIN/TIN)
- Your business address
- How you plan to spend the money
- The loan amount you are requesting
Note that for some lenders, a hard credit check may be required to create a profile. Before you submit, confirm that a hard credit check is not required so your credit score doesn’t take a hit. A FICO credit score of 600 or greater is recommended—though some platforms may accept lower.
Further reading: Building Business Credit: An 11-Step Guide
Create a profile
Once you’ve decided on peer to peer lending for your business, fill out a profile for a lending platform. Your profile determines your interest rates, repayment terms, and connects you with individual investors with the peer to peer lender playing matchmaker. These individual investors aren’t banks or business big shots, these are real people.
Pick your offer
Once your borrower profile is complete and your loan request is reviewed, pick from offers with varying interest rates and loan terms. Choose the option that best suits your needs.
Receive the funds
Everything is handled through the lending platform—you won’t need to connect with your investor at all, simply choose the offer you want. Your funds are deposited electronically into your bank account and any monthly payments are made through the platform.
Make your payments
You can set up automatic payments or make monthly payments through the peer to peer lending platform. While peer to peer lending platforms aren’t banks, they do still care about on time payments. Be diligent to avoid those unwanted late fees. Most peer to peer lenders don’t have prepayment fees giving you the freedom to pay off your debt early.
For all things funding a business:
- What to Prepare When Applying for a Business Loan (7 minute read time)
- Are Merchant Cash Advances Worth It? (6 minute read time)
- SBA Loans: A Complete Guide (Rates, Requirements, and How to Qualify) (12 minute read time)
- What is Invoice Factoring and How Does it Work? (10 minute read time)
For all things managing finances:
- Managing a Windfall of Money as a Business (4 minute read time)
- Leading a Small Business Through a Recession: Five Best Practices (7 minute read time)
- A How-To Guide for Creating a Business Budget (10 minute read time)
- What is Cash Flow? (A Simple Guide for Businesses) (16 minute read time)