Peer-to-peer loans can give entrepreneurs the chance to borrow money from private investors rather than banks, credit unions, and other traditional lenders. In this post, we'll take a closer look at P2P lending so you can decide whether it’s a good option for your unique situation. We'll also compare peer-to-peer loans to other business financing options, so that you can fully understand your options.
How Do Peer-to-Peer Loans Work?There are numerous online platforms that focus on P2P lending. Once you find a platform, you can submit an application. The application will ask you for basic information about yourself and your business, such as:
- A thorough business plan
- Bank statements
- Other relevant financial documentation
The Pros of a P2P LoanThere are several advantages of a P2P loan such as:
- Simple Application Process: You’ll find that most P2P lending platforms make it easy to apply for a loan and secure funding. You may apply online and receive an instant decision. Depending on the P2P lender you choose, the money may be deposited to your bank account that same day, within 24 hours, or within a few days.
- No Collateral: Since P2P loans are unsecured, you won’t have to put up any collateral such as your commercial property. This can give you some peace of mind because you won’t have to risk losing your business assets.
- Flexible: With a P2P loan, you may choose a business financing option that aligns with your unique needs. You can find investors who offer you various loan amounts and terms.
- Easy Access: If you can’t get approved for a loan option from a bank, the SBA, or another business lender, peer-to-peer lending may make sense. It can give you access to significant funds, even if you don’t have a good credit score.
The Cons of a P2P LoanJust like any financial product, a P2P loan comes with several drawbacks including:
- Fees: You may be on the hook for fees in addition to interest. 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: While you can take out a P2P loan with poor or fair credit, you may borrow more than you afford. This can put the financial security of your business on the line. Also, 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, P2P lending may not cover the full account. There’s a chance you’ll need to turn to other sources for additional funding.