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Updated May 01, 2024

What Is Peer-to-Peer Lending?

P2P lending, where individuals borrow directly from investors, can be a great option for many small businesses.

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Jamie Johnson, Business Operations Insider and Senior Analyst
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.

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If you’re looking to take out a loan, your first instinct might be to apply for a bank loan. That’s certainly a valid option, but today, borrowers have lending options far beyond what a traditional bank or credit union can offer. For instance, peer-to-peer lending allows investors to work directly with an individual or business looking to take out a loan. Peer-to-peer loans often come with surprisingly low rates and a seamless application process.  

We’ll explain more about peer-to-peer lending so you can decide if it’s the right fit for your business. 

Editor’s note: Looking for a loan for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

What is peer-to-peer lending?

Peer-to-peer lending cuts out the bank or financial institution and allows individual investors to lend money to individuals and businesses. Peer-to-peer lending has become a popular alternative form of lending thanks to its advantages for both the borrower and the investor. 

Peer-to-peer lending is often a good option for borrowers who have bad credit and wouldn’t qualify for a loan through a bank. It allows them to access the financing they need without having to turn to predatory payday lenders. 

Peer-to-peer lending is also a good option for business owners. The process is much faster than it is when you apply through a bank, and you could receive the funds within a week of approval. 

TipTip
In the market for a business loan? Check out our recommendations for the best business loans for small businesses.

How does peer-to-peer lending work?

In peer-to-peer lending, an investor lends money in exchange for interest on the loan payments. To get started, they sign up for a peer-to-peer lending platform such as Prosper or LendingClub.

These marketplaces match investors with borrowers who are looking to take out a loan. Once the borrower applies for a loan, they fill out 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 instance, some lenders provide loans geared toward debt consolidation. [Read related article: Tools to Help Manage Business Finances]

After the borrower has filled out the application, the lender checks the borrower’s credit score and decides whether to approve them for the loan. If the borrower is approved, the lender will fund the loan.

Pros and cons of peer-to-peer lending for businesses

Peer-to-peer lending allows businesses to obtain financing without applying through a bank. Let’s look at some of the biggest pros and cons of peer-to-peer lending. 

Pros

  • Streamlined application process: The most significant advantage of peer-to-peer lending is the easy application process. Businesses have to deal with far less paperwork and will know almost immediately whether their application is approved or denied.
  • Low rates: Peer-to-peer lending comes with surprisingly low rates because individual investors don’t have to pay the same overhead as banks do. Of course, you should always do your homework to ensure you’re getting the best deal possible.
  • Options for imperfect credit: A higher business credit score is always better when you’re applying for a loan, but with peer-to-peer lending, imperfect credit won’t necessarily disqualify you.
  • Fast funding: Once you’re approved for a peer-to-peer loan, you should receive the funds within a week. However, some marketplaces promise financing in as little as three days.

Cons

  • Fees: Although you may receive a low interest rate, peer-to-peer loans often have additional fees. For instance, some lenders charge an origination fee of between 1 percent and 8 percent of the total loan amount. Make sure you read the fine print before you agree to the loan.
  • High rates: One of the advantages of peer-to-peer lending sites is that excellent credit isn’t necessary to qualify. But if you have poor credit, you may get stuck with high rates and unfavorable repayment terms.

Peer-to-peer lending sites for businesses

Peer-to-peer marketplaces have grown tremendously in recent years, so it can be hard to know where to look first. If you’re interested in taking out a peer-to-peer loan, here are the best options to consider for your small business. 

Funding Circle

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

You will need excellent credit to qualify for a loan through Funding Circle. But initially, the company will do a soft pull on your credit, so there is really no downside to applying. 

LendingClub

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

When you’re ready to apply, you’ll be assigned to a dedicated client advisor, who will walk you through the application process. LendingClub is a good option for businesses that have a hard time getting approved for a loan from a traditional lender. 

Upstart

Upstart offers loans between $1,000 and $50,000 to individuals who are looking to start or expand a business. You’ll make monthly loan repayments over a repayment term of three to five years. Upstart doesn’t charge a prepayment penalty, but there is a one-time origination fee.

Upstart is an excellent option for borrowers who are looking to get a new business idea off the ground. The company prides itself on looking at a borrower’s potential and has tons of positive reviews. 

[Read related article: Small Business Guide to Getting a Loan]

Other types of loans available with peer-to-peer lending

In addition to personal loans and small business loans, here are some other loan options available with peer-to-peer lending:

  • Debt consolidation
  • Mortgages
  • Student loans
  • Auto loans
  • Auto refinancing
  • Medical expense financing

Peer-to-peer lending FAQs

In general, you can use a peer-to-peer loan for any purpose you choose. For example, you can use the money to fund a small business expense, consolidate debt or pay for an upcoming trip. The only exception is if your lender puts certain limits on what you can use the funds for. For instance, some lenders offer peer-to-peer loans specifically aimed at debt consolidation. As another example, if you take out
The investor takes on most of the risk involved in peer-to-peer lending. Every time an investor lends money, there is a chance they won’t be able to recoup the funds, or if the peer-to-peer marketplace suddenly closes, they may be unable to recover their investments. But there are risks for the borrower as well. Businesses with bad credit may not qualify for the best rates and loan terms. Although they may receive access to funding, they could end up paying a lot of interest.
If you’re interested in taking out a peer-to-peer loan, your first step is to find a lending marketplace. Look for a site that has a reputation for being trustworthy and a history of good customer reviews. It’s also a good idea to see how that business is rated by the Better Business Bureau. Once you’ve chosen a marketplace, begin the application process. Start by stating the amount you’re looking to borrow and the purpose of the loan. Then, enter your personal information and agree to a credit check. After you’ve been approved for a loan, review your interest rate, repayment terms and any additional terms for the loan. If you agree to the terms, you’ll take the loan to the funding stage. During the funding stage, the potential investors will review your application and decide whether to fund the loan. Once you’ve received the funds, you’ll move into the repayment stage. At this point, you’ll begin making weekly or monthly payments to repay the loan.

Is peer-to-peer lending right for your business?

If you’re looking to take out a small business loan and hoping to avoid the headache of applying with a traditional lender, peer-to-peer lending is a good alternative. Peer-to-peer lending cuts out the financial intermediary and allows you to borrow money directly from individual investors.

If you have an excellent credit history, you could qualify for a low interest rate. However, borrowers with poor credit are not disqualified from applying. Once you’re approved for a loan, do your due diligence. Compare offers from several lenders, and make sure the loan is worth what you’ll be paying.

Tejas Vemparala contributed to this article.

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Jamie Johnson, Business Operations Insider and Senior Analyst
For more than five years, Jamie Johnson has been guiding business owners on financial matters both big and small. This includes investment advice, insights on business loans and funding options, recommendations on insurance and more. Johnson excels at delivering easy-to-understand direction so entrepreneurs can make the best financial decisions for their businesses and, as a solopreneur herself, she regularly tests business strategies and services. Johnson's expertise can be found in a variety of finance publications, including InvestorPlace, Credit Karma, Insurify and Rocket Mortgage. She has also demonstrated a deep understanding of other B2B topics — including sales, payroll, marketing and social media — for the likes of the U.S. Chamber of Commerce, U.S. News & World Report, CNN, USA Today and Business Insider.
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