Do Peer-to-Peer Loans Work for Your Business?

You might want to consider peer-to-peer loans if you want to increase your cash flow or grow your small business. Peer-to-peer loans can give entrepreneurs the chance to borrow money from private investors rather than banks, credit unions, and other traditional lenders.

We take a close look at P2P lending so you can decide if it is right for your business or unique situation.

How Do P2P Loans Work?

There are numerous platforms online that focus on peer-to-peer lending. When you find the right platform, you can submit an application.

The application will ask you for basic information about yourself and your business including financial documents, bank statements, and a business plan.

When you are finished applying, the platform will review your application and your credit score. This will help them decide whether or not to approve you for a P2P loan. The higher your credit score, the greater your chances of approval. A higher credit score can also help you lock in a lower interest rate.

Upon approval, the platform will match your loan with prospective lenders or investors. They’ll decide on your loan amount and terms. If you decide to move forward, you’ll repay the business loan with interest via fixed payments, which are usually monthly.

Pros of a P2P Loan

  • Simple application process: you can apply online and receive a decision instantly. Depending on the P2P lender you choose, the money can be deposited to your bank account in just one day.
  • No collateral: you do not have to put up collateral because P2P loans are unsecured.
  • Flexible: you can find investors who offer you various loan amounts and terms.
  • Easy access: if you cant get approved for a loan option from a bank, P2P lending might make more sense. It can give you access to funds even if you have poor credit.

Cons of a P2P Loan

  • Fees: your lender may charge a fee to set up the loan and connect you to an investor. Other potential fees include origination fees, non-sufficient funds fees, and late payment fees.
  • High risk: missed or late payments may hurt your credit and make it difficult for you to secure financing in the future.
  • May need additional funding: if you need to borrow a large sum of money, it might not be enough. You may need to turn to other financing options.

Is P2P Lending Safe?

Unlike CD or savings accounts, peer-to-peer lending sites are not backed by Federal Deposit Insurance Corporation (FDIC) insurance. This makes them a significant risk for individual investors because they won’t have any protection against the money they lend.

P2P lending is safe for borrowers, but they are not all created equal. Before you commit to a P2P loan, do your research, and make sure that they are an established company. Also, read reviews and check out their rating on the Better Business Bureau.

The Bottom Line

While a P2P loan may seem like a good option at first, you’ll be better off with a small business loan from an alternative lender. An alternative lender is a safer option because you’ll deal directly with a reputable financial institution like a bank, credit union, or online lender.