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Guide to Peer-to-Peer Business Lending

Guide to Peer-to-Peer Business Lending

Overview of P2P Business Lending

The basic premise of P2P business lending is simple:

  • Business owners apply for a loan through an online P2P lending platform like Lending Club, Funding Circle, or Ondeck.
  • Investors review loan applications and invest in ones that meet their criteria. This allows the loan to be funded by many small investments rather than one large lender.
  • The P2P platform services the loan by collecting repayments and interest and distributing payments to investors.

This model helps small businesses access loans that may be unavailable through traditional banks. It offers investors higher returns for funding these loans. And it greatly simplifies and streamlines the overall lending process.

Benefits for Business Borrowers

P2P business lending offers several key benefits for small business owners looking for financing:

Faster Application and Funding Process

Because P2P platforms use automation and technology to review applications, small business owners can complete the process in just a few days rather than weeks or months with a bank loan. Once funded, borrowers gain immediate access to capital to grow their business.

Flexible Loan Amounts

P2P business loans typically range from $5,000 up to $500,000 or more, with many platforms specializing in loans under $100k. This makes them suitable for funding short-term needs or smaller expansions.

Competitive Rates and Terms

By opening up lending to individual investors, P2P platforms create more competition which can lead to better rates for borrowers. And terms are often more flexible than traditional bank loans.

Building Business Credit History

Taking out and repaying a P2P loan helps demonstrate that your business is creditworthy. This builds your business credit profile which makes it easier to secure lending in the future.

Risks and Downsides

While P2P business lending has many upsides, there are some risks to consider as well:

Higher Interest Rates

Because P2P lenders take on more high-risk borrowers, interest rates may be 10-30% APR or higher depending on the platform, loan amount, and your creditworthiness. Rates from traditional lenders could be lower.

Variable Investor Funding

Relying on individual investors to fund loans makes availability less reliable compared to traditional lending sources. Loan options could dry up during economic downturns.

Prepayment Penalties

Some P2P platforms charge fees for early repayment which could limit flexibility in paying your loan off faster. Always review the fine print first.

Tax Compliance Burden

If you receive investments from more than 200 individual investors, servicing the loan may fall under SEC regulations which adds accounting overhead.

Tips for Getting a P2P Business Loan

If you think a P2P loan is right for your business, here are some tips to secure financing:

Check Personal and Business Credit Reports

Having a credit score over 600 and minimal negative marks on your report typically meets requirements for P2P platforms. Fix any errors on your reports first.

Calculate How Much You Need

Determine exactly how much capital you need and how you’ll use it to grow your business. Provide detailed projections to show investors how they will get paid back.

Apply to Multiple Platforms

Increase your chances of funding by submitting applications to several leading P2P platforms like LendingClub, Funding Circle, and OnDeck.

Offer Security or Collateral

Putting up assets or equipment as collateral can improve loan terms and rates substantially since it reduces investor risk. Even if not required, offering collateral shows commitment.

Leading P2P Business Lending Platforms

While the P2P lending industry has consolidated recently, these platforms remain top options for small business owners:

LendingClub

  • Loan amounts from $5k to $500k
  • Fixed rates from 7.9% to 29.9% APR
  • Terms up to 5 years
  • Minimum credit score of 600

Funding Circle

  • Loans from $25k to $500k
  • Rates from 5.49% to 28.99%
  • Terms from 2 to 5 years
  • Minimum credit score around 620

OnDeck

  • Loans up to $500k
  • Rates from 9.9% to 98%
  • Terms up to 4 years
  • Uses business data beyond just credit scores

In the end, weigh all your financing options carefully before committing to a P2P loan. But this innovative lending model can provide fast, flexible funding to take your small business to the next level when utilized strategically. Reach out for help assessing the pros and cons for your specific situation.

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