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For some small business owners, securing capital is crucial. However, getting a bank loan can be challenging for startups or ventures that have not yet shown much revenue.
Peer-to-peer (P2P) lending is an option for those looking beyond traditional banks or credit unions. Keep reading to learn more about what P2P lending is, how it works, how to qualify for a loan, and more.
Key Points
• P2P loans allow borrowers to connect more easily with lenders via online platforms.
• Rates, terms, and loan amounts can vary, depending on the applicant’s risk level.
• P2P loans typically offer competitive interest rates for low-risk borrowers.
• This kind of loan provides access to funding for those who may not qualify for more traditional options.
• Different lending platforms have different requirements, so it’s a good idea to check that you are eligible before applying.
What Is P2P Business Lending?
With P2P lending, a business receives a loan directly from an investor or a group of investors. It eliminates the bank as a middleman, making it easier for borrowers and lenders to connect via online platforms.
For many borrowers, this is a viable financing option, as it may offer faster approval and more competitive interest rates, even for borrowers with less-than-perfect credit. For investors, it can be an opportunity to support businesses they believe in.
As with any form of financing, there are benefits and drawbacks to consider for loan crowdfunding with P2P lending.
Recommended: Learning About Microloans
How Does P2P Business Lending Work?
Peer-to-peer business lending is an alternative financing option that allows borrowers to connect directly with investors through online platforms. This can be helpful for borrowers who may not qualify for a bank loan, who desire a faster loan turnaround, or who are looking for competitive interest rates.
P2P lending for businesses follows this basic process:
1. The P2P lending company assesses a borrower’s credit via its platform to determine eligibility. Lenders have different requirements regarding credit ratings, with some being stricter than others.
2. Based on their credit assessment, the lending company assigns applicants a credit rating and interest rate to help lenders and investors choose the risk level they are happy with.
3. Borrowers make a listing for their loan, often with additional information such as what the loan will be used for, why they’re a smart investment, and other introductory information for lenders and investors.
4. Lenders can then review your listing and decide whether to make an offer, outlining the amount they can lend and their repayment terms.
5. When the listing ends, qualified offers from lenders combine to form a single loan, which is then disbursed directly to the borrower for immediate use.
P2P lending platforms typically make money by charging fees to both investors and borrowers. When comparing a bank loan to a P2P loan, borrowers should consider these fees and each lender’s interest rates to ensure they’re getting the right loan for their needs.
Recommended: Unsecured Business Line of Credit for Startups
Typical Peer-to-Peer Rates, Terms, and Amounts
Rates, terms, and loan amounts for P2P business loans can vary greatly depending on the applicant’s risk category, investor criteria, and the P2P platform being used. Generally, the platform will determine the interest rate for borrowers based on their risk factor.
Pros and Cons of P2P Business Loans for Borrowers
P2P business lending offers both borrowers and investors numerous benefits, but it can also involve risks. Understanding some of the pros and cons can help you make an informed decision when looking into peer-to-peer loans for your small business.
Pros:
• Quick loan-application process and funding times
• Competitive interest rates for low-risk borrowers
• Access to funding for those who may not qualify with traditional lenders
• More personal process as lenders can get to know the borrower’s story based on their profile
• Access to unsecured loans
Cons:
• Unlike most banks, P2P platforms may not be backed by the Federal Deposit Insurance Corporation
• Higher default rates
• Interest rates can vary greatly, depending on the borrower’s risk category
Common P2P Business Loan Uses
One advantage of P2P business lending is that funds can be used for a variety of purposes, making it a viable option for many small business owners.
Common uses for P2P loans include:
• Startup funds for new businesses
• Real estate costs
• Equipment purchases
• Inventory purchases
• Cashflow management
• Expansion costs
Five Tips on Qualifying for a P2P Loan
Before applying for P2P business lending, check out these valuable tips to help you prepare and qualify:
1. Collect Documents Before Applying
You may need to provide:
• Tax returns
• Bank statements
• A business plan outlining the reason for the loan
• Identifying documents
• Documents regarding your income and outstanding debts
2. Check Your Credit Score
Check both your personal and business credit. Knowing your credit score will help you determine which P2P loans you’re eligible for. If your credit rating is low, you can take steps to build it, such as paying off existing balances and making loan payments on time.
3. Check Your Eligibility
Most P2P lenders will have basic requirements for loan applicants, such as proof of citizenship, age, residence, and bank account information.
4. Determine What You Can Afford
Assess your business needs and finances to determine how much money you need to borrow and whether you can pay back the loan responsibly.
5. See About Pre-Qualifying
P2P lenders who offer pre-qualification typically do so via a soft credit pull (which does not affect your credit score) to make sure you meet basic eligibility requirements before applying.
How to Apply for a P2P Business Loan
As with any loan, you’ll need to make sure you are eligible for the P2P loans you want to apply for. After you’ve determined eligibility, take the following steps to apply for business financing:
1. Determine the Loan Amount
Determine the loan amount you’ll ask for by assessing your financial situation to fully understand your needs and how much you can afford. You may also be able to use this amount when seeking pre-qualification or joining a P2P platform.
2. Compare P2P Lending Platforms
Research different loan products offered on P2P lending platforms, taking note of the different loan amounts, interest rates, qualifications, and restrictions. Remember that P2P loans are typically for smaller amounts, which means loan terms may be short.
3. Apply Through Your Chosen P2P Lending Platform
Lending platforms have different approval requirements, but most will likely assess your credit score and history. From there, they may assign you a credit rating and interest rate that lets investors know your risk level as a borrower.
4. Set Up Your P2P Loan Listing
If you’re approved to join the P2P platform, the next step is to create a loan listing or a loan request. Although the setup process may be different on each P2P platform, you’ll usually be asked to provide information regarding your business, how much money you need, and why you need it.
Investors will then have the chance to review your loan request. Depending on your listing, there may be several investors who each lend a small amount or one or two investors who lend a large amount. Once the bidding period ends, the funds are transferred to you.
Alternatives to Peer-to-Peer Business Loans
P2P business lending offers loans for a variety of business purposes, but if you need additional funding, consider these other financing options:
Restaurant Loans
Restaurant loans serve the needs of restaurant owners looking to start, renovate, or expand their small business.
Commercial Real Estate Loans
Commercial real estate loans are granted to business entities (individual or group) that need funding to purchase a property for commercial use.
Franchise Financing
If you’re preparing to open a franchise, a franchising loan can help cover expenses such as franchise fees and the capital needed to start a business. In addition to general lenders, there are franchise companies that specialize in loans specifically for franchise owners.
Equipment Financing
Equipment loans are used to purchase equipment necessary for business operations. Loan terms typically depend on the equipment’s life expectancy, with the equipment acting as collateral for the loan. Interest rates can vary depending on business revenue and risk factor.
Microloans
Microloans are those given for smaller amounts, generally $50,000 or less, to support small businesses without access to other types of funding. They are usually offered by nonprofits, government agencies, or individual lenders for a variety of business expenses and often focus on specific borrower types, such as female entrepreneurs, underserved communities, or veterans.
Working Capital Loan
A working capital loan is used to cover everyday expenses such as payroll, monthly bills, and repairs. Many small businesses rely on working capital loans to manage short-term cash flow fluctuations caused by seasonality, economic changes, or business expansion.
Business Line of Credit
A business line of credit is a short-term loan option that gives borrowers access to a set amount of credit, determined by the lender, for covering unexpected business expenses and investing in growth opportunities. Some lines of credit are revolving, while others end once you pay off the loan amount.
U.S. Small Business Administration (SBA) Loans
SBA loans are short- or long-term business loans ideal for helping a business start or expand. They are partially guaranteed by the SBA, making them less risky for lenders. SBA loans have competitive rates and terms for creditworthy borrowers.
Recommended: How to Get a Small Business Loan in 6 Steps
The Takeaway
P2P business lending may offer borrowers flexibility when choosing the right loan for their needs. Whether you’re just getting started or you’ve been in business for years, P2P business lending might help you get the capital you need promptly.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Should small businesses choose P2P lending?
P2P loans can be a good choice for small businesses that need a flexible, accessible financing option. However, if you need a larger sum or a longer repayment period, a P2P loan may not be suitable. Evaluate your needs carefully to decide which loan type is best for you.
Who can apply for a P2P business loan?
Any business can apply for a P2P loan, including those that may not qualify for traditional loan options. However, every lending platform has different requirements, so it’s best to research a variety of platforms to ensure they provide what you need and that you are eligible to apply.
What documents do I need to apply for a P2P business loan?
The documents needed upon application vary by platform, but can include bank statements and financial documents, identifying documents, and the reason for the loan. Always investigate a platform’s requirements to ensure eligibility and that you have everything you need to apply.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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