Peer to Peer lending (P2P) is a back-to-basics approach to finance. It represents an important step away from huge, centralized lending institutions. It places control of lending terms back into the hands of individuals, both buyers and lenders. Many P2P companies issue loans from individuals to other individuals, but many of these also offer loans to businesses. We’re going to focus on this latter portion of the industry in this guide.
How Has Traditional Lending Failed Businesses?
P2P serves a broader range of businesses than traditional lending. Because banks and other large financial institutions have large infrastructures to support and shareholders to please, they must be very choosy when vetting prospective borrowers. This results in one of three problems for businesses seeking loans this way:
- Loans are issued with very high interest. In order to make sure they don’t lose any money, banks balance risk by lending money at very high rates of interest. The extra funds generated through interest offset the losses potentially incurred through user default. This interest may be much too high to be affordable for the average business, even if the business is well qualified for a loan.
- Loan requests are denied. In order to lend to only the most qualified candidates, banks frequently deny a loan to businesses with mid-range or poor credit, or to businesses that have not been in operation for very long.
- The Loan process is too lengthy and complicated. Banks require a lot of paperwork, public meetings, and long waits for their loans. Businesses operating in the real world will need funds quickly, but cannot be served fast enough by traditional lenders.
How Does P2P Lending Fix the Problem?
P2P makes business loans accessible fast, to a broader cross-section of the market than do traditional lenders. Different P2P lending companies operate in different ways. But there is a P2P lender out there to meet the needs of just about every business. This varied market meets the needs of diverse businesses in the following ways:
- Loans are issued quickly. Many lenders can usually have funds issued to your bank account in less than 48 hours. Some work even faster than that.
- P2P Loans have competitive terms. Because P2P loans are financed by real individuals, there is internal industry competition to provide businesses with attractive rates, in order to win their business. Many P2P lenders bid on loan proposals using a “Reverse Auction” format, where the lender willing to issue the loan at the lowest interest rate wins the contract.
- P2P Loans are available for the greatest variety of businesses. As stated above, many businesses are denied loans at traditional lending institutions. While not every P2P lender accepts all prospective borrowers, there is a P2P lender for every sort of business – even the smallest businesses, new startups, and those with poor credit.
- P2P Lenders consider the overall health of your business – not just a credit score. P2P lenders use nuanced methods to determine the creditworthiness of a business. While no two are just alike, many evaluate a business’s health on the basis of the online sales reliability and consistent cash flow. These are more relevant details than a simple glance at a credit score.
Who are Some of the Best P2P Business Lenders?
P2P is a very diverse lending field, especially in the UK. With so many excellent lenders to choose from, it can be hard to know where to start. Here are four of the very best, each appealing to a slightly different kind of business.
- ZOPA – The oldest P2P lender, no list like this would be complete without ZOPA. This company offers unsecured business loans to businesses with a 2-year+ trading history, with owners at least 20 years old.Loans are offered between £1,000 to £25,000 at 1 to 5 year terms, with no penalty for early repayment. ZOPA is very trusted in this industry, offering competitive APR of about 7-16%.
- ThinCats – This company offers loans to the most qualified candidates. Young businesses or those with poor credit need not apply. But those that are approved will can receive £50,0000 to £3,000,000 in secured loans at 6.41% to 16.86% APR. ThinCats is all about quality, for borrowers and lenders, so don’t come here for the fastest approval. Approved ThinCats borrowers almost never default.
- Lending Club – Lending Club is an excellent P2P business loan provider in the US. With APR offered between 5.9% and 29.9%, loans can wind up being very expensive or very affordable. But with a long history and consistently excellent service, qualifying US businesses will be hard-pressed to find a better P2P option in the lending market.
- RateSetter accepts the widest variety of business borrowers. Business owners need only be UK residents at least 21 years old, have good credit and income, and possess a valid bank account. With a representative APR of only 7.9 to 9.9%, these are affordable loans for those who qualify. Though they accept brand new businesses, only 10-15% of applicants will go on to be approved. This ensures a high level of quality for both borrower and lender.
Frequently Asked Questions
- How do P2P Lenders Mitigate Risk? Every P2P lender has a different solution to this problem, but most lead with one of these strategies: 1) Loans are only issued to highly qualified borrowers, who are unlikely to default, in order to keep interest rates low and the overall service affordable to excellent candidates. 2) Loans are issued to borrowers with poor credit or business history, but high interest is instated. Because bad credit businesses default on loans more often than those with good credit businesses, high interest rates act like insurance against the occasional borrower default.
- What Information or Paperwork Will I Need to Get a P2P Business Loan? Many P2P lenders only look at your online merchant history. Others will need tax records. The most scrutinizing lenders will contact you over the phone to get business information and request specific records. All reputable P2P lenders will list their information requirements on their website.
- Are P2P loans secured or unsecured? Generally, P2P business loans are unsecured, but there are exceptions. Lenders like ThinCats offer the highest available loans. In order to mitigate the risk of default, these loans are secured, but will have lower APR. Smaller loans, available from companies like Fleximize, are offered to smaller companies who are unable to risk their business assets as collateral on a loan. These loans remain unsecured in order to be available to a wider swathe of the business community.
- Is P2P Lending Safe? The P2P lending industry is regulated by the Financial Conduct Authority in the UK and the Securities and Exchange Commission in the US. Despite this, there have been P2P lenders who have dissolved and others who have a poor reputation among borrowers and lenders. Many trusted P2P lenders exist, and new users will do well to do their research before seeking a loan with a new company. In all of our reviews, we publish a “Credibility Score” for each company examined.
- Can I Invest in These Companies? All companies listed in this guide make lending available to individual investors. Potential investors will be vetted just like borrowers, so not all will be approved. But for those who qualify, P2P investing can be a reliable source of excellent returns. Some similar companies offer B2B loans, with no possibility for investment. All true P2P offers investment options to individuals.