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Understanding Peer to Peer Lending

In the aftermath of the financial crisis, borrowing and lending took on a new shape in the United States. Distrust in the banking system combined with the need to regrow the economy led to the emergence of several types of alternative financing, with peer to peer business loans quickly becoming one of the most popular among entrepreneurs.

Peer to peer (P2P) lending allows investors to fund personal and commercial loans through an intermediary lender. These companies operate in the Internet marketplace, drawing on funds from multiple investing sources and eliminating the standard banking protocols. The financiers assume any risk of borrower default while the party orchestrating the transaction, the actual P2P lender, takes on no financial responsibility.

peer to peer lending

Pros and Cons of Peer to Peer Loans

There are pluses and minuses to this type of lending, though many small businesses find that these pros outweigh any cons

  • Expedited processing
  • Flexibility
  • Minimal requirements
  • Variety of terms

The only major downside is the potential for a high interest rate. Since these loans are unsecured and uninsured, elevated interest payments are often the only incentive for lenders to provide funding. Beyond that, borrowers mostly stand to benefit from securing a P2P loan.

Faster Processing

Due to applicant volume and regimented procedures, it can take multiple weeks for a bank to underwrite a loan. For a small business trying to cover the costs of growth or maintain cash flow during a slow period, waiting for bank approval isn’t an affordable luxury. P2P lending, aided by Internet processing and multiple investing sources, typically has a turnaround time under two weeks, and many lenders can get a request processed and paid within just a few days.

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Whereas some financing options are only available to select businesses or entrepreneurs who meet very specific criteria, peer to peer lending can be utilized by almost everyone. Whether you own a manufacturing company or operate a fleet of vehicles, this form of marketplace lending can provide companies with both small and large loan amounts. While any company can make use of P2P lending, it’s important that borrowers have a sound repayment strategy to avoid excessive interest charges.


Nearly anyone can make use of P2P lending, as long as they meet the minimum requirements and live in a U.S. state that permits peer loans. Most lenders won’t advance cash to individuals with a credit score lower than 640, though some companies are willing to look at factors other than a FICO score, including annual income, education and work history. Once you’ve submitted an application through the lending website, you’ll be assigned a loan grade; this letter (or number in some cases) designates your riskiness, which will influence investors and also determine your interest rate. While a bad grade will drive up APR, high-risk borrowers aren’t simply turned away, as often happens with bank loans.

Range of Terms

Many commercial loans have to be repaid within a year and sometimes as quickly as six months after the money is issued. Peer to peer business loans allow for much longer repayment periods, typically no longer than five years but rarely less than one or two. Longer terms enable startups and growing businesses to borrow money without having to immediately use their working capital to reimburse the lender.

Is Peer Lending the Right Alternative Source for You?

Before a business owner decides which lending option is best for his or her company, it’s important to understand the difference between the various choices. P2P business loans have become popular in the last few years because of their versatility and accessibility, though there’s a case to be made for other options as well.

Depending on your business, situational loans like invoice factoring and asset-based lending might be most beneficial. Businesses with accounts receivable that need a quick burst in cash flow can go through a factoring company that will buy the outstanding invoices and provide immediate funds without any subsequent interest expenses. Alternatively, a business owner who has heavy equipment but poor credit might look to obtain a secured loan that requires collateral.

Different loan options benefit different companies, though peer to peer lending may provide the widest array of borrowing options since the money is sourced through so many individual investors.

Best P2P Lenders

As the lending marketplace continues to grow and diversify, more and more companies are offering peer to peer business loans. While there are many quality lenders, here are three of the top choices.

Lending Club

Lending club has been one of the premiere lending options since it was founded in 2007. The company offers both personal and business loans, and the money is sourced through individual and institutional investors. Interest rates will vary widely, but borrowers can expect to receive the requested capital within a week.


Applicants with shaky credit might still be able to get a decent rate when securing loans though Upstart. This company was started by former Google executives and takes pride in looking past a person’s credit score. Loan amounts range from $1,000 to $50,000, with interest rates often staying in single digits.


Prosper was the first P2P lending company in the U.S., and they have extended over $6 billion in loans. Prosper allows investors to offer as little as $25 in individual funding, creating opportunities for diversification and a better risk/reward ratio for those fronting the money. That flexibility, in turn, allows for more applicants to receive their financing.