An Introduction to P2P Business Loans
Every company, no matter how successful, needs a little financial help every now and then. Whether it's to cover the expenses of a particularly tough year or for making a leap forth into new and exciting business ventures, access to extra capital at the right moment can truly be a lifesaver.
If you're a business owner in need of a financial boost, you'll be glad to know that, thanks to the technical modernization of the financial market, there are now more ways to secure funding than before. The most popular way to get business funds is still to get a loan from a bank, but that doesn’t work for every business owner. Thanks to technology, there are many alternatives.
One of the alternative ways of getting a loan for your company, on the other hand, can be through Peer-to-Peer Lending. Made for dynamic business environments where time is of value, P2P business loans are becoming increasingly popular these days, as this form of lending is notably exempt from lengthy checking procedures and other difficulties that pester traditional bank loans.
In this guide, we'll discuss the topic of peer-to-peer (P2P) business loans, so that by the end of reading it, you'll be able to decide on whether or not it would be a good idea for your particular business. Among other things, we'll explain what P2P loans are in the first place, who gives them out, how to apply for one, as well as the criteria you'd need to fulfill to qualify for such a loan.
Before we start, note that P2P loans come in different forms, depending on the kind of company demanding it, as well as the business that lends it. In this guide, we'll describe the general features of a peer to peer business loan, to help you make your decision, no matter which lender you decide to work with later.
What is a Peer-to-Peer Business Loan?
In contrast to getting a loan from a bank, a peer-to-peer loan is an amount of money you borrow from an investor (or, a peer) who gives you the sum from their own resources, rather than redistributing the money about like the banks do.
Peer-to-peer lending is a more direct, personal way of borrowing money, as it eliminates the intermediary (like a bank) from the equation. Proponents of P2P lending say that this makes the lending process easier, and more free of rules, regulations, and rates. This form of lending is also called person-to-person lending or social lending.
When it comes to how the investors get their money back (and then something), the deal boils down to two points: 1) origination fees, and 2) a percentage of the interest earned on the loan. Origination fees typically range from 1 to 6% of the grand total sum, while the percentage taken from the interest rate depends on each individual lending company. This is just a generalized view of the system, of course, as individual investment companies operate under their own specifically-adapted versions of the two aforementioned money-making devices.
Who Uses P2P Loans?
Nearly any company can apply for a P2P loan. They are typically used by businesses that can't yet secure a standard bank loan but at the same time wish not to sell a half of their company to an investor in order to get funding.
Thanks to the lowered criteria and regulations of the companies issuing them (as compared to those of a typical bank), peer-to-peer business loans represent an alternative for those businesses who want a competitive interest rate and a transparent money-transferring process.
The Most Common Users of P2P Loans
Since P2P loans typically have low limits to the amount of funding available, P2P loans are most popular among small businesses and startups. The online nature of this form of loan means a swift and easy application process, something that small businesses tend to appreciate. Of course, P2P lending is not restricted to any particular type of business.
Who Gives P2P Loans?
The principle of issuing, or, indeed, securing a P2P loan works thus: an individual investor or lending institution decides to lend money to a particular business under certain conditions. The platform they use dictates these conditions, ensuring that both the lender and the borrower are treated fairly. The role of such a platform is to facilitate deals and secure both parties from any potential abuses.
In cases where the lender is not an individual but an institution, some of these can be:
- Hedge Funds
- Life Insurance Companies
- Banks
If you're confused by the inclusion of banks in this batch, don't be. Other than issuing loans and making deals with clients on their own terms, banks can also act as a regular investor. If they do assume that position, they'll be obliged to play by the rules of the P2P agency.
Another key distinction when it comes to peer-to-peer loans is the one between personal and business loans. Currently, the number of companies specializing in personal P2P lending far exceeds the number of business P2P lenders. The reason behind is simple: personal loans are easier to process and the deal itself can be done quickly. In contrast, business P2P loans take longer to get approved and typically involve larger sums of money.
How Do You Apply For a P2P Business Loan?
One of the advantages of considering a P2P business loan is that the application process is usually very simple. Filling out an online application form usually doesn't take more than a few minutes. With some agencies, you can expect an application decision in as few as two or three business days.
While every online lending platform will have its own special form for applications, most of them require roughly the same pieces of information, including:
- The amount you wish to borrow
- Business name
- Business address
- Business phone number
- Owner (of the business)
- Number of employees
- Legal structure of your business (sole proprietor, LLC, C-corporation, etc.)
- E-mail address (for creating an account)
- Password (for creating an account)
- Annual business revenue
On top of this information, a P2P business loan agency will also want to know about your credit history and the current state of your company finances. Some lenders even have a requirement that your business has been profitable for at least two years.
In addition to that, almost all P2P lenders require you to have a FICO score of 600 or higher. As an unwritten rule, P2P lending companies aim to reduce the risk associated with giving loans as much as possible. In order to achieve this, they actively seek to make deals with clients with a demonstrated positive track record.
Finally, when it comes to applying for a P2P loan, you may need to make a pitch for your business. P2P lending companies do routinely ask for your personal guarantee that you're telling the truth about your finances as a part of the application process. Some lenders take extra steps to reassure themselves that the borrower won’t go default. Because of this, other than checking with the lending agency, they might want to know more about the reason you're seeking a loan, so be prepared to give a truthful and detailed answer.
What’s the Criteria for Being Granted a P2P Business Loan?
Before approving a loan, the lending company in question will first check if the person submitting the application passes their criteria. In contrast to the general application form (which we talked about in the section above) where you fill in the required fields yourself, the criteria for being granted a loan is something that is an integral policy of the lending company, so you can't expect it to be altered along the way.
Typically, most of the companies specializing in issuing loans have roughly the same basic requirements. These include:
- Providing proof of a United States citizenship, a document of permanent residency, or a long-term visa. Some P2P lending companies might not accept applications from non-residents, even if you do have a visa.
- Being 18 years of age.
- Providing a verifiable bank account
These requirements are typical, though you’ll want to check with the lender, since requirements may vary. If you do meet all of the requirements, then the company will consider your application. As a part of the application evaluation, the company will consider the following aspects of your proposal:
- The information you provided on the application sheet
- Your credit score
- Further information about the state of your credit and finances provided by credit bureaus
- Any other relevant information that might somehow impact your ability to meet your monthly payment obligations
Other than these criteria, applicants with a higher credit score, as well as a solid debt-repayment history generally stand a better chance of getting approved.
The Rising Popularity of P2P Loans
Mostly thanks to their 'user-friendliness' and willingness to consider everybody for a potential loan, P2P lending companies have been growing in popularity ever since they first hit the market.
Who Benefits the Most from P2P Loans?
So far, the biggest winners of the 'P2P loan revolutions' would probably be small businesses and startups. Since these two categories of companies typically struggle the most when it comes to securing a bank loan, the less-strict criteria that P2P companies offer enables them to get funding and the necessary materials to promote and expand their business.
P2P Growth Projections for the US
When financial services in the US are in question, the P2P lending companies are growing at by far the fastest rate. The expansion is so fast, in fact, that the current projections state that US P2P companies will make up for at least 45% of global P2P lending business by the year 2020. (Source: Statista, December 2017)
All in all, the popularity of P2P lending shows no signs of declining anytime soon.
Best Online P2P Lenders
If you've decided to give P2P lending a shot, you should know that there is a large number of lending companies out there, so picking the right one will require a bit of homework.
Ultimately, the choice of the P2P lending company is entirely up to you. There are now lending companies specializing in certain types of lending or investors, which means you'll have many options to review.
Here are three popular P2P lending companies worth taking into consideration:
Lending Club
Types of loans they offer: personal loans, business loans.
Who is eligible to invest: everyone
Pros
- A well-established pattern of service and clear terms of use.
- Applying online takes only minutes and they will even send you a pre-approved offer almost immediately.
- Available in the majority of the US states.
Cons
- Some applicants may be asked to show their tax returns.
- Lending Club takes the possibility of defaults very seriously. If the lender considers you a default risk, you'll most likely be getting some phone calls from them.
Prosper
Types of loans they offer: personal loans
Who is eligible to invest: everyone
Pros
- An easy application process with detailed instructions.
- More leniency toward clients with a bad credit past. Provided you have some valid reasons for the negative occurrences.
- Reasonable interest rates for a good credit standing. For a bad one, you may still get an offer, however your rate will most likely be higher.
Cons
- The loan amount is restricted to $35,000.
- Since these are personal loans, they aren’t the best choice for most business purposes.
- Prosper requires a minimum credit score of 640, which may disqualify many people.
Street Shares
Types of loans they offer: small business loans
Who is eligible to invest: only accredited investors
Pros
- A fast application process with a speedy loan delivery in 1 to 5 days.
- Offers a wide array of term loans without the requirement of application fees.
- No penalties for prepayment.
Cons
- Somewhat short repayment periods of 3 to 36 months depending on the loan.
- You can only borrow up to 20% of your annual revenue, so the loan amount can be too limiting for some businesses.
- The website doesn't really display all the key pieces of information for a potential customer.
Potential Dangers of P2P Loans
As popular and, apparently, effective they are, P2P loans are still a relatively new breed of financial deals, so they may not work great for everyone. This goes both for investors and the borrowers. Here are some important pros and cons to take into consideration:
As a borrower
Pros
- Low-interest rates in general
- Fixed payments on a monthly basis
- The majority of the loans are unsecured
- Credit requirements not as strict as that of a bank
Cons
- High-interest rates for those with a bad credit
- Missing monthly payments will hurt your credit score
- Some websites have high maintenance fees
- Typically low limits on how much you can borrow
As an investor
Pros
- A higher yield than with savings accounts or CD accounts
- A chance to diversify your loaning portfolio
- Access to investments other than just stocks and bonds
Cons
- Risk of potential instability, since P2P is still a new market
- Risk of losing money if your borrower defaults
- Some lending sites are only available to accredited investors
FinTech Companies: The Future of Financial Services
Financial Technology (or “fin tech”) companies have brought with them a new way of accessing funding and credit . In recent years, this emerging business sector has been best known for innovations in mobile banking, cryptocurrencies, as well as credit and investing services.
In particular, loans have become quite popular as a means of investment and there is a number of interested people who wish to connect with lenders or borrowers across the nation. At Fundbox, we provide a secure platform for anyone who'd like to apply for flexible funds to grow their business.
The Fundbox application process is simple, fast, and doesn't require any paperwork to get started. Apply online in minutes by simply connecting your business bank account and approved accounting software—or just your business bank account by itself—with our platform and providing a few basic details about your business. We'll come back with a decision about your request in under three minutes (based on the median decision time for Fundbox customers).
Fundbox has no minimum credit score requirements. We like to see businesses that have at least 2-3 months of transactions plus revenue of $50,000 or more.
Fees start as low as 4.66% and vary depending on the client and your situation. Thanks to advanced AI technology, we’re able to provide fast credit decisions that account for a variety of business data sources, rather than relying solely on your FICO score.
Ultimately, it's you, the business owner, who calls the shots. At Fundbox, we invite you to see what we're all about. With a 9.7/10 rating on Trustpilot across over 1,000 real customer reviews, we’re confident that our platform is a solid choice for U.S. business owners looking to access fast, reliable funding right away.
Want to see how much credit you qualify for? Click here, and find out.