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Peer-to-peer business lending

Give your business a boost in capital with a peer-to-peer business loan.

Editor's choice: Funding Circle business loans

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Anna Serio
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Peer-to-peer (P2P) loans can be a great asset to small businesses and startups looking for funding to expand, take on new employees or even cover day-to-day expenses. They tend to be friendlier to new and businesses that might otherwise have trouble qualifying for a bank loan.

While peer-to-peer (P2P) lending has been around for a long time, widespread use of the Internet, Zopa in the UK and Prosper in the US have led the way for P2P lending. This guide focuses on P2P lending for businesses.

What is a peer-to-peer business loan?

A peer-to-peer business loan is a type of financing funded by investors instead of one direct lender. P2P business loan providers oversee of the loan's application process, underwriting and repayment but don't provide the funds themselves. Instead, investors finance loans in exchange for a portion of your interest.

Marketplace lending is another commonly-used term for peer-to-peer lending, though it's not entirely accurate. When you apply for a P2P, your application enters a P2P marketplace where one or more investors choose to fund your loan. However, marketplace lending is not restricted to investors. Business loan marketplaces can also include more traditional lenders as well.

Compare peer-to-peer business loans

Funding Cirlce

$5,000 to $500,000

Starting at 4.99%

620+ personal credit score, 2+ years in business, for-profit business in an approved industry

Lending Club

$5,000 to $500,000

12.15% to 29.97%

12+ months in business, $50,000+ in annual sales, no bankruptcies or tax liens, at least 20% ownership of the business, fair personal credit score or better

How does P2P business lending work?

From the borrower's perspective, P2P business loans tend to work like any other type of online loan. You fill out a pre-approval application, review your potential rates, apply and then get your funds. Some platforms are designed more like crowdfunding sites and require borrowers to set up a profile and pitch to investors themselves, but those are less common.

To get a P2P loan, you generally must agree to a hard credit check and disclose your business’s financials. The lender usually gives you an APR and a borrower grade, which your lender will determine based on factors like your business's credit score, your personal credit score and annual revenue. This credit risk score also helps the investors decide whether or not to invest in the loan.

Soon after you apply and are approved, your loan is funded. The actual process will differ between lenders, but usually you will repay the loan directly to the investors with the P2P lender simply facilitating the loan.

5 loan features to consider when comparing P2P business lending

When you’re comparing peer-to-peer lenders to get a loan for your business, various aspects require your attention. These include:

  • Interest rate. While the credit risk your business presents plays a vital role in the APR you get, know that not all lenders charge the same rate. If you’re borrowing a considerable sum, even a small difference in APR can have a telling effect on the total interest payable.
  • Fees. The interest you pay towards your loan is one cost. You also have to pay attention to the fees, as these can escalate the cost of your loan easily. Most peer-to-peer lenders charge loan origination fees. Some will also charge prepayment fees.
  • Loan amount. Peer-to-peer lenders tend to have minimum and maximum limits in place. However, the maximum you can borrow also depends on factors such as the creditworthiness of your business, its debt-to-income ratio as well as prospective growth. Some peer-to-peer lenders let you borrow up to $1,000,000.
  • Loan term. Loan terms of 12, 24, 36, 48 and 60 months are common. The amount you wish to borrow can have an effect on the minimum and maximum loan term offered.
  • Secured or unsecured. You may or may not have to provide collateral, depending on the lender you choose and the amount you wish to borrow. With larger amounts, there’s a good possibility you’ll have to provide collateral. This can come in the form of cash savings, deposits, home equity, equipment or vehicles.

What are the benefits and drawbacks of P2P business lending?

  • Quick process. You can apply for a typical peer-to-peer business loan online in five to 10 minutes. The platform you apply through then matches your application with possible investors. With that out of the way, you can get approved funds in your bank account in a matter of days.
  • Use funds for any purpose. You can use proceeds from an online peer-to-peer loan for practically any business-related purpose such as relocating, expanding, buying equipment, refinancing debt or hiring more employees.
  • Credit score cutoffs. You would normally require good creditworthiness to get a peer-to-peer loan. While you can get one with poor credit rating too, the choices remain limited. You would then have to pay a high APR as well.
  • Fees. Since P2P lenders don’t get as much of a return on their loans as direct lenders, they sometimes charge closing fees before you get your funds. These usually are a percentage of the amount you borrow, typically ranging from 0.5% to 5%.

3 cautions of peer-to-peer business lending to avoid

  1. Borrowing more than you can afford to repay. If you think you might have problems repaying the loan in a timely manner, it’s best that you avoid taking a peer-to-peer loan in the first place. Not repaying the loan on time can hurt your business's credit and can make it more difficult for it to qualify for financing in the future.
  2. Applying for multiple loans at once. Multiple hard credit inquiries can hurt your credit score and looks bad to other lenders. While credit unions treat multiple credit pulls as one types of loans as one — mortgages, car loans and student loans in particular — P2P business loans usually don't fall into this category. If you want to compare rates, you might want to apply for prequalification instead, which doesn't affect your credit.
  3. Not reading your loan documents. Your loan documents should give you a clear picture of your loan's APR and any other fees and charges you may have to pay. It outlines the terms and conditions of repaying your loan.

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