Updated on 11.10.16

Understanding Peer to Peer Business Lending

Getting a loan for your small business can be a grind. Maybe your local banker doesn’t think your idea is as brilliant as you do. Maybe a poor financial decision in your youth left a decent-sized dent on your credit score. Maybe you need a lot of money in a short period of time in order to get your business off the ground. Perhaps you’re a startup founder and you want a quick way to raise money without diluting your equity. If you’re facing any or all of these issues, it could be a good idea to look into a peer-to-peer business loan.

The Basics of Peer-to-Peer Business Lending

Peer-to-peer lending (we’ll use industry parlance and call it P2P moving forward) is a way to secure a loan without the use of a traditional financial institution. As is implied by the name, a P2P loan comes either from one of your peers or from a group of individuals, not from a bank.

To get one of these loans, you must first register with a P2P site (we profile a number of them below). The company running the site functions as the underwriter, but they do not fund the loan. That privilege goes to the individuals registered on the site who believe that you’re credit-worthy enough to secure the loan. In effect, these sites have two sets of clients: those looking to borrow money, and people investing in those borrowers (funding their loans) in hopes of earning a better return than they might in stocks or other investments.

The advantages of this method are that you can generally get a loan faster than if you go the traditional route. The downside is that you’re likely going to have to accept a higher interest rate. It’s like that old saying: You can only pick two from this list when it comes to a business service: Fast, good, and cheap. If you want a quick decision on a loan from a reputable source, it’s usually going to be more expensive.

Here are universal parameters of the P2P loan industry. There are minor variations among the different companies, but they all follow the same general principles.

  • You have to have been in business for at least a year. These services aren’t for people who need a seed investment to get their initial idea off the ground.
  • The size of available loans will vary dramatically. Some services will offer loans for as little as $2,000, and others go all the way up to $10 million.
  • Similarly, the loan terms are going to vary considerably, with repayment periods ranging from three months to five years depending on the service.
  • As for interest rates, the APRs will be anywhere from a reasonable 8% to unwieldy 40%. It goes without saying that you don’t want a 40% interest rate to start compounding – that’s more than double even the average credit-card APR — so be sure you absolutely need every penny of the loan you take out and that you’ll be able to repay it.
  • Across the board, you are not going to have access to P2P lending if you’ve had a recent bankruptcy or if you have any tax liens.
  • All companies require your credit score to be at least 600, with some making the cut-off at 620.
  • Finally, there is the minimum annual revenue requirement. Some companies don’t require you to show any proof of revenue, and will invest in your fledgling startup. Other lenders need you to prove at least $25,000 in annual sales, and the most strict require at least $75,000 in revenues.

The Main Players in P2P Lending

Upstart

Upstart is a newer service on the scene, and they’re making their name by making it easier for people to get loans even if they have a very high debt-to-income ratio. The company was founded by ex-Google employees, which gives it some Silicon Valley cred, and presumably makes them more attractive to millennials. Another benefit is that your loan can be instantly approved.

Prosper

Prosper was the first P2P player on the scene. They make it clear on their website that they have no hidden fees or “tricky fine print” — which could be in part related to the difficulties they had early on with the Securities and Exchange Commission (SEC), when the company was forced to shut down until it could reach an agreement over its financial reporting practices. Since this issue was cleared up, Prosper has been lauded for their transparent and fair lending practices.

Lending Club

Lending Club is the largest player on the P2P market, and the most recognized name. But, as with Prosper, they have faced their fair share of challenges recently. Their CEO was embroiled in a scandal and stepped down because of it in May of 2016. He left “after an internal review found the sale of $22 million of loans to an investor contravened the investor’s express instructions.”

That doesn’t mean you should preclude Prosper in your quest to find a loan, just that you should perform due diligence before working with any disruptive company working in a highly regulated sector. They seem to have bounced back with their new management, and they continue to fund billions in loans.

CircleBack

CircleBack offers larger loans than most companies in this space, and they pride themselves on getting you a decision on your loan very quickly. Unfortunately, they also offer the highest potential APR of all the P2P companies (35%). So, be wary if you have an exceptionally low credit score.

Street Shares

Street Shares differentiates itself by offering high levels of customization. For instance, their website has a heavy focus on the fact that they can help veterans get funding. They promise that veterans looking for loans will be funded by other veterans, with the hopes that such complementary pairings will work out better for both lender and borrower.

Funding Circle

Funding Circle was started when the founders became frustrated with the lending marketplace after being rejected for a loan by the banks 96 times. So, they are passionate about making sure people get the money they deserve.

One thing going in their favor is that they guarantee a decision on your application in 72 hours, even for loans up to $500,000. Also, they count the UK government as an investor, so depending on how you feel about that county’s stability, that could provide some peace of mind.

P2B Investor

P2B Investor offers the largest possible loan of the companies we investigated. They dole out loans up to 10 million dollars. You will obviously have to be quite the candidate to receive that much money, but if you are looking for a ton of capital this could be an intriguing option.

Summing Up

There are a couple of other things to keep in mind when it comes to P2P loans. One is that some services charge a prepayment penalty, and many levy a 5% “closing fee.” Watch out for such fees and penalties, and make sure to read and understand all the terms of any loan you sign up for.

Some P2P companies are also getting a bad rep for sneaking in hidden fees. For example, LendUp is a small P2P lender that was recently embroiled in a scandal for having bad compliance practices and hidden fees. As new players and technologies appear in the financial services industry, there are usually some unsavory companies that spring up as well, so make sure to always read the fine print.

If you’re able to qualify for an SBA loan or other traditional business loan, that’s often a better first choice. However, if you’ve done your research and you need a non-traditional loan, a peer-to-peer business loan can be a simple and effective option.

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