For some small business owners, securing capital is crucial. However, getting a bank loan can be challenging for startups or ventures not yet showing much revenue.
Peer-to-peer (P2P) lending is an option for those who want to look beyond traditional banks or credit unions. Keep reading to learn more on what peer-to-peer lending is, how it works, how to qualify for a peer-to-peer loan, and more.
What Is Peer-to-Peer 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 form of financing as it offers faster approval and financing at desirable 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 pluses and minuses to consider for this form of loan crowdfunding.
Recommended: Learning About Microloans
How Does P2P Business Lending Work?
Peer-to-peer business lending is an alternative form of financing that allows borrowers to directly connect with investors via online platforms. This can be helpful for borrowers who may not qualify for a bank loan, those who desire a faster loan turnaround, or those looking for competitive interest rates.
Peer-to-peer lending for businesses follows this basic process:
1. A borrower’s credit is assessed with a soft or hard credit pull via the P2P lending platform to begin the process of establishing eligibility. These platforms have different qualifications regarding credit ratings, with some more strict than others.
2. Based on their credit history and score (among other factors), applicants will be assigned a “loan grade” to help lenders and investors choose the applicant that presents the least amount of risk. The loan grade will typically dictate what interest rates and loan terms you receive.
3. Borrowers make a listing for their loan, complete with what the loan will be used for, why they’re a smart investment, and other introductory information that helps lenders and investors make a decision.
4. Lenders then have the opportunity to bid on listings, including the amount they can lend and interest rates offered.
5. When the business’ listing ends, all qualified bids from lenders combine to form a single loan, which is then deposited directly into the borrower’s account for immediate use.
The P2P lending platforms typically make money by charging fees to both investors and borrowers, like origination or closing fees. When comparing a bank loan to a P2P loan, it’s important for borrowers to consider these fees and interest rates to ensure they’re receiving the right loan for their needs.
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Typical P2P Rates, Terms, and Amounts
Rates, terms, and loan amounts for peer-to-peer business loans can vary greatly depending on the applicant’s qualifications, investor criteria, and the P2P platform being used. Generally, the platform will determine the interest rate for borrowers based on their qualifications.
Pros and Cons of P2P Business Loans for Borrowers
Peer-to-peer business lending offers both borrowers and investors numerous benefits, but there are also risks involved. Understanding some pros and cons can help you make an educated decision when looking at peer to peer lending for small businesses.
Pros
• Quick loan application process and funding times.
• Competitive interest rates for well-qualified 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.
• Many loans are unsecured.
Cons
• Limited regulations on peer-to-peer business lending could make this riskier than loans with traditional lenders. Some are not backed by FDIC, as banks are.
• Some P2P lenders offer small loan amounts, leaving borrowers to seek additional funding elsewhere.
• Interest rates can vary greatly depending on the borrower’s qualifications.
Common P2P Business Loan Uses
One of the advantages of P2P business lending is that funds can be used for numerous purposes, making it a viable option for many small business owners.
While peer-to-peer business loans may be sought by businesses that don’t qualify for a loan at a traditional bank or lender, almost anyone can apply for P2P loans. Common uses for P2P loan uses include:
• Peer to peer lending for startup funds
• Short-term business loans for smaller or urgent purchases
• Equipment purchases
• Inventory purchases
• Cashflow
• Business renovation and expansion
• Consolidating with a small business debt consolidation loan or refinancing business debt
5 Tips on Qualifying for a P2P Loan
Before applying for peer-to-peer business lending, check out these valuable tips to help you prepare and hopefully qualify:
1. Collect Documents Before Applying
You may need to provide items like:
• Tax returns
• Bank statements
• Business tax returns
• A business plan
• Identifying documents
• Personal story to share with investors reviewing your P2P inquiry
• Documents regarding 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 improve it, such as paying down debt and paying bills on time.
3. Check Your Eligibility
Most P2P lenders will have basic requirements to apply, 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 if you can responsibly pay back the loan.
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 check if you meet basic eligibility requirements before applying.
How to Apply for a P2P Business Loan
As with any loan, you’ll want to take steps to make sure you are eligible for the P2P loans you’re applying for. After you’ve determined eligibility, take the following steps to apply for business financing:
Determine the Loan Amount
After assessing your financials to see what you can afford and what you need, determine your loan amount. You may also be able to use this amount when seeking pre-qualification or joining a P2P platform.
Compare Peer-to-Peer Lending Platforms
Research different loan products offered on P2P lending platforms. Take 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.
Apply Through a Peer-to-Peer Lending Platforms
Different platforms will have different requirements for approval. However, most will likely assess your credit score and history. From there, they may assign you a “grade” that lets investors know how risky of a borrower you are. Most P2P platforms will also provide you with an interest rate for your loan request. If you approve the rate, you can move on to securing funding.
Set Up Your Peer-to-Peer Loan Listing
If you’re approved to join the P2P platform, the next step is to create a loan listing, or loan request. The process for setting up your loan listing will differ from one P2P platform to the next. In general, you’ll likely have to provide information regarding what your business is, how much money you need, and for what reason.
Investors will then have the chance to review your loan request. Depending on the listing, there may be several investors who each lend a small amount or there could be one or two investors who lend a large amount. Once the bidding period is over, the funds are combined into one loan and made accessible to you.
Alternatives to Peer-to-Peer Business Loans
Peer-to-peer 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 a restaurant business.
Commercial Real Estate Loans
Commercial real estate loans are granted to business entities (individual or group) for a commercial property or land that is solely for business use.
Franchise Financing
If you’re preparing to open a franchise, a franchising loan can help with the expenses, including the franchise license, franchise fees, and necessary startup capital associated with starting a business. In addition to general lenders, there are also franchise companies who specialize in offering loans specifically for franchise owners.
Equipment Financing
Equipment loans are used to purchase equipment necessary for business operation. Loan terms are typically equal to the expected life span of the equipment, and the equipment acts as collateral for the loan. Interest rates can vary depending on the industry, type of equipment, and qualifications.
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 often offered by nonprofits, government agencies, or individual lenders to be used for a variety of business expenses and often focus on specific types of borrowers, such as female entrepreneurs, underserved communities, or veterans.
Working Capital Loan
A working capital loan is used to cover everyday expenses like payroll, monthly bills, and repairs. Many small businesses rely on working capital loans to manage short-term cash flow fluctuations due to seasonality, economic changes, or when expanding their business.
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, which is determined by the lender, to be used for business expenses like repairs, emergencies, or working capital. Some lines of credit are revolving, while others end once you pay off the loan amount.
SBA Loans
SBA loans are short- or long-term business loans ideal for helping with starting or expanding a business. They are guaranteed by the US Small Business Administration (SBA), making them less risky for lenders. SBA loans have competitive rates and terms for well-qualified borrowers.
Recommended: Business Loans vs. Personal Loans: Which Is Right for You?
Compare P2P Lenders
Peer-to-peer business lending offers borrowers flexibility when choosing the right loan for their particular needs. Whether you’re just getting started or you’ve been in business for years, P2P business lending can help you get the capital you need in a timely manner.
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.
SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.
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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