How Do Peer-to-Peer Small Business Loans Work?


Although things appear to be loosening up for small businesses in need of capital financing, it is still a challenge for those that lack business assets that can be used for collateral or business owners who don’t want to risk personal assets to guarantee a loan. Seeing the need to fill a big void left by traditional lenders, an entirely new industry of alternative lenders has emerged to serve the financing needs of fledgling businesses.

Among the fastest growing segments of this industry are peer-to-peer (P2P) lenders, which have become a reliable source of small business loans for thousands of businesses not considered creditworthy enough by traditional banks.

Who are the Leaders in Peer-to-Peer Business Lending?

The P2P lending industry has been expanding rapidly, accounting for more than $20 billion in loans in 2016 with the expectation of reaching $200 billion within the next 10 years.

A smaller group of P2P lenders have carved out a niche in the very competitive small business market. Among the leaders in that group are Lending Club, Funding Circle, Street Shares, and Able Lending. Here is a brief overview of each.

Lending Club

Lending Club is the undisputed leader in the P2P lending world, giving it a leg up in capturing market share in the small business segment. Just as it has with individual borrowers, Lending Club holds itself out as the lender of choice for the average business that needs a shot in the arm.

It offers the widest range of loan options between $5,000 and $300,000 that can be used for nearly any business expense. Loan terms range between one and five years and the APR starts as low as 6 percent but can run as high as 35 percent. LendingClub also offers a line-of-credit up to $300,000 with a repayment term of up to 25 months.

LendingClub can have the best small business loans for business borrowers with great credit because of its competitive rates and flexible repayment terms. Although it only requires a credit score of 600 to qualify for a loan, borrowers can pay as high as 35 percent interest, which is higher than most credit cards. But then, borrowers with a low credit score probably couldn’t access $20,000 or $30,000 of new credit on their credit cards.

Businesses only need $50,000 of annual revenue and 12 months of operational history to qualify. Although there is no collateral required, for loans over $100,000, LendingClub requires a UCC-1 lien, which can be attached to any of a business’s liquid assets, such as cash, accounts receivable, and inventory. Loan fees range between 1.99 and 6.99 percent and are deducted from the loan proceeds.

Funding Circle

Funding Circle has quickly emerged as a major competitor to LendingClub. It will issue loans in the range of $25,000 to $500,000 with terms of six months to five years. It offers a low APR of 7.4 percent to its most creditworthy borrowers, but less qualified borrowers can pay as high as 36 percent.

Although Funding Circle does not have a minimum revenue requirement, it does require that businesses have an operational history of at least two years, and business owners need a minimum credit score of 620 to qualify. The average Funding Circle borrower has 10 years of operational experience and annual revenues of $2 million.

After a quick and easy loan application, qualified borrowers can receive their funds within 10 days, not the quickest among online lenders, but still much quicker than an SBA loan. Funding Circle charges a 3 to 6 percent fee on loan balances, which is deducted from the loan proceeds. It also charges a 1 percent annual servicing fee on the outstanding loan balance which is included in the loan repayment amount.

Street Shares

Street Shares maximum loan amount is only $100,000, but its requirements are less stringent than other P2P lenders. To qualify for a loan, a business needs one year of operational history and $25,000 in annual revenue. The amount of the loan is capped at 20 percent of a business’s revenue up to $100,000. Its APRs are at the higher end, starting at 9 percent and ranging up to 40 percent. Its application process is simple, with little documentation required. Loans can be funded within one to five days. Loan fees are at the lower end, ranging from 1.45 percent to 4.95 percent.

Street Shares has carved out a couple of niches in the small business market – one with veterans who need small business financing and one with businesses that receive government contract work. If you are a military veteran who owns a business, Street Shares will try to match you up with veterans who want to invest in small businesses owned by veterans.

For businesses that secure a government contract, Street Shares will advance between 80 and 90 percent of the contract amount up to $500,000. Once Street Shares is paid by the end customer it passes the balance onto the borrower, minus fees.

Able Lending

Able Lending takes peer-to-peer business lending to a new level where it actually puts peers in touch with real peers – borrowers and investors with personal and professional relationships. If your business needs funds, you can use Able Lending’s social media platform to reach out to friends and families to become financial backers.

As with most P2P lending arrangements, they become investors who earn a return on your loan. Able will lend up to $1 million based on your ability to gain pledges. Your funds are available once your backers have paid their pledges. The interest rates currently range from 8 to 25 percent.

The minimum amount of pledged funds raised must amount to at least 10 percent of the total loan amount. What isn’t raised through pledges, Able will fund. Borrowers can earn a lower rate by raising more backer funds. Borrowers need a minimum credit score of 600 and the business must have at least one year of operational experience and $100,000 in revenue. Borrowers can also apply for a more conventional loan fully funded by Able with the same credit requirements. The loan fee for all business loans is 5 percent.

Traditional Small Business Loans Are Hard to Come By

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Most businesses, regardless of their type or stage of development, will need access to capital at some point to expand beyond what its cash flow or working capital can currently support. In that situation obtaining a small business loan to provide a capital infusion that would allow it to grow operations and increase its revenues, which are used to repay the loan, would be a good option.

Businesses with equipment or other assets could obtain a secured loan collateralized by those assets. Businesses without assets would have to seek an unsecured loan that would have to be guaranteed by the owner’s personal assets. Traditional banks are less accommodating of small businesses that lack an extensive financial and operational history, and until recently, there was nowhere for a small business to turn.

The Rise of Peer-to-Peer Business Lending

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The financial crisis of nearly a decade ago converged with a new, Internet induced, phenomenon called “the sharing economy” to create an entirely new form of small business financing. Instead of relying on banks with their strict lending requirements, P2P lenders bring investors seeking a better yield on their money together with underserved borrowers to create a free market digital marketplace. Borrowers create a profile and pitch their case to the marketplace of investors.

Investors, which are individuals and institutions, can choose from among a portfolio of borrowers and invest as little as $25 per borrower. The P2P lender acts as an intermediary, screening and rating the borrowers based on their creditworthiness and matching them with investors. Investors can diversify their loan portfolio by investing in dozens of different borrowers. Depending on the P2P lender, business borrowers can request up to $300,000 with loan terms between one and five years, and the interest rates can range from seven to 35 percent.

The Pros and Cons of Peer-to-Peer Business Lenders

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Peer-to-peer lending opens the door wide open for small businesses that otherwise can’t qualify for bank loans. Businesses with short operational and financial histories are considered based on the strength of their sales and revenues. Businesses without established credit can qualify based on the business owner’s personal credit score and there is no collateral required.

Some of the other advantages of P2P business loans include:

  • Quick and easy application and approval process with funding in three to five business days
  • Lower interest rates compared with credit cards
  • ​The best rates for qualified borrowers are often lower than rates available from traditional lenders
  • ​Borrowers remain anonymous to their lenders
  • Borrowers who pay on time can easily reapply for additional financing

The disadvantages or risks of P2P loans are few but worth noting.

  • Some P2P lenders require a personal guarantee on loans above a certain amount
  • ​For borrowers with less than great personal credit, the interest rates can be fairly high
  • Failure to pay on time will hurt the borrower’s personal credit

On balance, P2P loans offer many small businesses the very best opportunity to obtain much needed financing. For some, it may not be the most inexpensive form of financing, but if it is made for the right reasons and handled responsibly, a business can grow its way into less expensive financing available through traditional banks and the Small Business Administration (SBA).

Source: LendEDU