Until a few years ago, small businesses were limited to obtaining business loans from banks and other traditional sources. But in the last few years, another source has opened up, and that's peer-to-peer (P2P) business loans. These are loans tailored specifically for small businesses, and they provide greater credit options than what small business owners can find at banks.
P2P Lenders Have Become Important Sources of Business Loans
It's fortunate for small businesses that P2P platforms that make business loans are coming into the market. Banks – the most traditional source of loans of all types – are not particularly interested or generous when it comes to making loans for business purposes. If you are a business owner and have attempted to get business financing, you're likely well acquainted with the difficulties of the process.
This is especially true in the small business space. Banks make loans to businesses, but those are primarily well-established businesses. More typically, they represent medium- to large-businesses. Banks see these as lower risk lending niches, since companies have strong track records, as well as large revenue streams and asset bases to secure the loans. That kind of stability is usually not as obvious with small businesses, and banks make getting a loan particularly difficult.
Complicating the process is that banks often don't make business loans for less than $100,000. They usually see smaller loans as not worth their time and effort, based on the profitability of the loan. That means that if a small business only needs $50,000, they may not even be able to find a bank willing to talk to them.
But P2P lending is opening up for small businesses. Here are five of the most prominent P2P lenders in the sector:
You always have the ability to use personal loans for business purposes with Lending Club, but Lending Club has been gradually segmenting its loan types, which includes dedicated business loans and business lines of credit. The personal loans are still available, which will enable you to get an unsecured loan for up to $40,000 to use for your business. But the business loan programs will enable you to borrow much larger amounts.
In fact you can borrow an amount of up to $300,000. Business loans are installment loans with terms that run from one to five years They are fixed rate, with fixed monthly payments, and will be paid in full at the end of the term. Business credit lines on the other hand, are revolving credit arrangements, that function like credit cards or home equity lines of credit.
Lending Club does not require business plans or projections, nor do they generally ask for appraisals or title insurance. No collateral is required for loans for less than $100,000, and when collateral is required for higher amounts, it's usually a general lien on the business and personal guarantees from the owners of the business. What's more, loan proceeds can be used nearly any purpose.
In order to qualify for a Lending Club business loan or business line of credit, you must be in business for at least 24 months, and have at least $75,000 in annual sales. You must also own at least 20% of the business and have at least fair or better personal credit. This generally requires a credit score of at least 660, with no recent bankruptcies or tax liens.
Interest rates run between 8% and 32%, and there is an origination fee equal to between 0.99% and 6.99%. But there are no application fees, and no prepayment penalty.
Where Lending Club and other P2P lenders offer business loans as part of their loan mix, Funding Circle is expressly set up to provide business loans specifically.
Funding Circle provides business loans for a minimum of $25,000 up to a maximum of $500,000. Like Lending Club, business loan terms can range from one year to five years, and you can use the proceeds to just about any purpose – refinancing existing debt, hiring more employees, buying inventory or equipment, or moving or expanding your business operation.
In order to qualify for a business loan with Funding Circle, you must have a minimum credit score 640, and not have any bankruptcies or judgments within the past seven years, nor any outstanding tax liens or unsatisfied judgments.
You must be in business for 24 months and showing a profit in at least one of the last two years. You must also have minimum annual revenue of $150,000 in each of the two most recent calendar years.
Business loans will not require any specific physical collateral, but you will have to execute a Form UCC-1 filing as well as provide personal guarantees by each owner of the business.
Interest rates can run between 5.49% and 27.79%, and there is an origination fee that ranges between 1.49% and 4.99% of the loan amount.
Unlike Lending Club and Funding Circle, Prosper doesn't have a dedicated business loan program available. However you can take an unsecured personal loan of between $2,000 and $35,000 and use it for business purposes.
In order to qualify for a loan with Prosper, you must have a minimum credit score of 640 with Experian (that's the credit bureau that they base your credit score on). You will need to furnish a copy of your recent income tax return if you are self-employed.
Interest rates run between 5.99%, to a maximum of 35.97%. Prosper also charges an origination fee equal to between 1% and 5% of your loan. There is no application fee, and no prepayment penalty.
Like Prosper, Upstart doesn't have a specific loan program for business loans, but does allow you to take a personal loan which can be used for just about any business need that you have. Upstart is a little bit different from other P2P lenders in that they look beyond traditional credit criteria, but they also consider your education. This includes your major, your grade point average, and even the college or university you attended. They consider that certain major fields of study have advantages over others, and it figures into the underwriting mix.
You can borrow from a minimum of $3,000, to a maximum of $35,000. They have two loan terms, 36 months and 60 months. Though they are not specifically business loans, they have a major advantage in that they require no collateral for the loan.
As a self-employed person, you will need to provide the most recent year’s income tax return, as well as copies of current year invoices for your business. They will also likely require a copy of your college transcript if you graduated within four years of applying for a loan. You must have a minimum credit score 640, and not have any bankruptcies or other negative public records on your credit report.
Interest rates run between 4.66% and 29.99% for 36 month loan, and between 6.00% and 27.32% for 60 month loans. It's likely that they also charge an origination fee, since that is the practice with P2P lenders, but it is not disclosed on their website. Assume that will be in line with other P2P lenders origination fees.
PeerForm follows the same path as Prosper and Upstart in that they don't have a specific business loan program, but they do have personal loans that you can use for just about any business purpose you choose.
Loan amounts range between $1,000, and $25,000, and all are for a term of 36 months. These are installment loans that come with fixed rates and fixed monthly payments, and will be paid in full at the end of the loan term.
Interest rates range from 7.12%, up to 29.99%. There are no application fees, and no prepayment penalties. However PeerForm does have an origination fee between 1.00% and 5.00% of the loan.
In order to qualify for a PeerForm loan, you must have a minimum credit score 600, which is lower than any other P2P lender on this list. However, your credit report must also reveal no delinquencies, bankruptcies, tax liens, judgments, or non-medical related collections within the past 12 months.
You can have a maximum debt-to-income ratio of 40%, but this does not include mortgage debt on your personal residence. Your credit report must also show a minimum of one revolving account, you must also have at least one open bank account in order to qualify for a loan.
The P2P Business Loan Advantage
That's five major P2P lending platforms that have business loans available in one form or another. If you are in need of a smaller loan amount – less than $35,000 – and you are looking for a simple unsecured loan that you can use for business purposes, then Prosper, Upstart and PeerForm should to be able provide you what you're looking for. But if you need a larger amount, like several hundred thousand dollars, and your business is a little bit better established as far as length of time in business and cash flow, then you will want to go with either Lending Club or with Funding Circle.
Whatever you choose, the upshot is that you are no longer limited to getting business loans strictly from banks. You can now take advantage of P2P platforms, and likely have a greater chance of getting the financing you need for your small business. And you likely have every reason to believe that you will also get your loan a lot faster and with fewer questions and less documentation.