Guide to Peer-to-Peer Lending –

For small business owners, borrowing money without the hassle of going through a bank is ideal. Banks have extensive eligibility requirements, and even if you’re approved, it can take a long time to get the money. Business owners and entrepreneurs who don’t have good credit may find it especially difficult to get approved, even if their businesses are healthy. 

If you need a loan and can’t get one from a bank, it’s worth considering an alternative lending approach like peer-to-peer (P2P) lending. Through online lending platforms, you can get approved even with less-than-perfect credit. 

Online lending platforms facilitate P2P lending by safely connecting borrowers to investors. These lending platforms set all rates, ensure all terms and conditions, and allow the transactions to occur. 

For investors, P2P lending is an attractive option because peer loans generally offer a higher return on investment than the lender would receive from traditional financial institutions. 

Did you know? Peer-to-peer lenders played a vital role in helping small business owners weather the pandemic. When banks weren’t willing to lend, P2P marketplaces stepped up.

What is peer-to-peer lending, and how does it work?

P2P lending is a financial transaction in which an investor loans money directly to a borrower through an online platform. Instead of a financial institution lending money, it is individuals who lend to other individuals or businesses. 

“Normally, P2P lending works online, and the P2P lending platform vets the borrowers wishing to get loans and creates a profile for them on their platform,” Saurabh Jindal, CEO of Talk Travel, told “The lenders then evaluate the borrower and lend accordingly. Each lender is not supposed to provide 100% of financing for the borrower; rather, it is pooled by various lenders.” 

Jindal said that a lender will provide loans to many borrowers, which diversifies their portfolio and reduces risks. The borrowers usually pay a lower interest fee than they would for a bank loan.

Editor’s note: Looking for a small business loan? Fill out the questionnaire below to have our vendor partners contact you about your needs. 

What can you use a P2P loan for?

Peer-to-peer loans tend to have fewer restrictions than other types of business loans, such as equipment financing and bank loans. While you can use the money for almost anything, these are the most common business use cases for a P2P loan:

  • Startup funding 
  • Short-term capital for emergency purchases 
  • Inventory purchases
  • Filling cash flow gaps 
  • Business growth or expansion opportunities
  • Paying down debt or refinancing expensive loans

How do you qualify and apply for peer-to-peer loans?

While peer-to-peer loans are easier to obtain than bank loans, there is still an underwriting process. Lenders look at the following criteria to determine whether to extend you a loan. 

Credit history

Your credit history will be the biggest determinant of whether you qualify for a P2P loan. In most cases, you are eligible if you have a credit score above 600. However, some lenders may look for a minimum score of 640 or higher. If you have a higher credit score, you’re more likely to qualify for a lower annual percentage rate (APR) offer. 

Income and debt

Your income and debt-to-income ratio are additional variables P2P lenders consider. Some lenders want a debt-to-income ratio below 50% before you qualify for the lowest APR available.

Business information

Lenders don’t want to invest in one-hit wonders or fly-by-night businesses; they want solid investments. As a result, they also look at your business’s fundamentals, including years of operations and annual revenue or sales. 

Applying for a loan is a straightforward process, but it does require you to be a smart consumer. To avoid any issues, take the following steps:

1. Study the contract.

Credit agency Experian recommends that you read the fine print before applying for a P2P loan. For instance, not all P2P lenders can operate in every state. The lender should also provide loan interest rates and maximum loan amounts before funding. Some P2P lenders may encourage you to borrow above what you need, but consider borrowing a moderate amount instead so you can pay the funds back on time.

2. Apply digitally.

Applications for P2P loans are similar to other funding types. You’ll need to fill out an electronic application and provide copies of tax returns, W-2s and 1099s. The lender may also request recent bank statements and pay stubs. You should also provide proof of any other income you receive, such as child support or pension payments.

3. Await your terms.

The lender will review your application and determine if you qualify for the loan. You will be given a set term to pay back the loan, usually no more than five years. Maximum loan amounts are usually no more than $50,000 for a P2P loan. 

TipTip: Before you apply for a P2P loan, get all your paperwork in order, including tax returns, bank statements and proof of other assets. That will cut down on the time it takes to get funding.

What is peer-to-peer lending for investors?

Individual investors open an online account on a lending platform and deposit money that can be used for peer loans. The applicants who want to borrow that money share their financial profiles and associated risk categories. The interest rate is predetermined, and the borrower then evaluates offers from investors and accepts one. 

P2P lending offers investors a way to earn a higher return than they would receive from traditional investments. But the process can be riskier as well, due to the default rates of borrowers on peer lending sites. 

P2P lending is different from stocks and bonds, which allow investors to diversify their portfolios, according to Kyle Gomez, founder of The Potential of Money. Gomez said that this type of lending also has these benefits: 

  • Control: P2P lending platforms let you choose the types of loans to offer and how much to invest in each one. There are very few restrictions, allowing investors to be as creative as they want to be.
  • Accessibility: Loans range from three months to five years and are usually from a global marketplace. This gives investors massive opportunities that other investment products simply don’t. P2P lending can also be a great alternative for borrowers with bad credit history who would be turned down by a traditional lender. 
  • Speed: Lenders can invest in loans from halfway around the world in a matter of seconds.
  • High interest rates: Personal loans tend to have a minimum of 10% interest, which is a very attractive return for an investor.
  • No banks: Removing the middleman from loan transactions makes loans cheaper for borrowers and more profitable for investors. Also, though it may seem trivial, antipathy for banks has been growing since the 2008 financial crisis. Many investors prefer working on a P2P platform, removing banks from the picture. 

What is peer-to-peer lending for borrowers?

For borrowers, P2P lending involves pitching their loan requests to marketplace lenders and then reviewing offers from investors, according to Shahid Hanif, co-founder and CTO of Shufti Pro. 

“The borrowers select one loan and P2P lending starts,” Hanif said. “All the monthly payments and money transfers are handled through these platforms. The process is completely automatic, and borrowers can bargain with lenders as well.”

Peer loans present an additional financing option for a wide range of purposes, including debt consolidation, student loans, real estate projects, working capital, and equipment or inventory purchases for your business. 

Bottom LineBottom line: Everyone benefits in a P2P marketplace. Borrowers get access to capital, and lenders get a return on their investment.

What are the types of peer-to-peer loans?

Many P2P loans are unsecured. You may want an unsecured loan or line of credit because unsecured funding doesn’t require you to pledge collateral. Secured funding requires you to pledge assets that you or your business own, such as real estate, equipment and inventory. 

Business loans

A business loan can help you grow your company, especially if you’re a startup attempting to scale. But your ability to qualify usually depends on your credit profile or your business’s revenue. We found through our research on the best business loans that unsecured business loans tend to carry a higher interest rate than secured ones.

Typical interest rates for peer-to-peer loans are similar to those of traditional bank loans. Rates for peer-to-peer loans range from 7% to 39% APR, while traditional bank loans range from 6% to 36% APR. 

A real estate developer who is looking for money to fund a project and has exhausted traditional bank options should consider P2P lending. Real estate lending, or real estate crowdfunding, is a type of business loan that allows a company to fund property construction and development projects with investor money rather than going through a traditional lender. 

Personal loans

Borrowers can use personal loans to finance vehicle purchases, home improvements or medical bills. These loans can also cover debt consolidation, and they don’t usually have the high credit requirements and other criteria of most financial institutions. 

There’s a wide range of interest rates on unsecured personal loans. On average, these are short-term loans that consumers can receive from banks, credit unions, or private lenders. Most personal loans range from two to five years, and they are usually repaid in monthly installments. Personal loan interest rates generally range from 5% to 36%, depending on your credit score. For personal loan terms of two to five years, the average loan amounts range from $2,000 to $35,000. 

Student loans

Peer-to-peer student loans can be a great alternative to more traditional forms of educational funding. These loans are a good option for individuals who might not qualify for federal or private student loans. 

Student loans are generally allocated in lump sums, which allows the borrower to distribute the money according to their school expenses. Most student loans are short-term loans, ranging from one to three years. 

Bottom LineBottom line: Whether you need cash for working capital or want to pay off costly credit card debt, a P2P loan can be a viable option. You just have to make sure the cost to borrow is worth it.

Is peer-to-peer lending safe?

P2P lending is generally safe for both borrowers and lenders, since the lending platforms are registered with the U.S. Securities and Exchange Commission, and work with FDIC-insured banks to issue loans and hold uninvested money. 

Peer-to-peer lending sites have ways to make the process safe, which Jindal said may include the following security measures: 

  1. They vet and conduct due diligence on the borrowers and give them ratings that are displayed to the investors (lenders). 
  2. They provide buyback guarantees (through insurance) to the lenders. In case of default by the borrower (inability to pay back the loan), the insurer compensates the lender. 
  3. They make sure each loan request is met by multiple lenders. A lender who invests in multiple places diversifies their portfolio, reducing risk. 

Like any other investment, P2P lending involves some risks. There are two main risks, according to Gomez: defaults and lending site bankruptcy.

  1. Defaults: When a borrower defaults on their loan, it could affect the investor. Ultimately, the money being borrowed is theirs. 
  2. Lending site bankruptcy: It’s possible that the lending site will take on too many loans and won’t be able to fund them all. 

P2P lending has many benefits, such as better return on investment, cost advantages, and investor relationships. However, there is one additional risk that individuals should understand – cybersecurity, according to Will Ellis, founder of Privacy Australia. 

“Due to the online nature of peer-to-peer lending, there are gateways for criminals to gain access to your private information, and the fact that this is financial information means that the risks are massive,” Ellis said. “There are many forms of cybersecurity, which individuals can implement to protect their information and create as many barriers between their information and cybercriminals as possible.” 

What are some peer-to-peer lending sites?

Marketplace lending connects borrowers with willing online lenders. Many lending marketplaces offer new loan opportunities and loan refinancing. There are numerous platforms within the lending industry, so do your research and choose the lending company that best meets your business’s needs. Here are a few popular online P2P lending platforms. 


LendingClub is one of the leading online lenders, offering business loans, personal loans, auto refinancing and patient solutions. Business owners interested in LendingClub’s small business loan can receive capital upfront with terms of one to five years, fixed monthly payments, and no prepayment penalties. Interest rates on LendingClub’s loans range from 8.05% to 35.89%. You can borrow up to $40,000.


Prosper is a good lending network for when you need money fast. Prosper allows individuals to apply as borrowers and offers several loan types, including debt consolidation, home improvement, military and small business loans. This lending network offers fixed three- or five-year terms for its loans of a maximum of $40,000. Interest rates range from 6.38% to 35.36%.

Funding Circle

Funding Circle is an online peer lender that’s all about small business loans. It offers fixed-rate term loans, requiring a minimum of two years in business and a minimum FICO credit score of 620. Amounts for its small business loans range from $25,000 to $500,000.


Peerform is a peer-to-peer lender focused on personal loans. This marketplace operator makes getting an installment loan quick and easy. Internet rates on its loans range from 5.99% to 29.99%, depending on your credit score. You can borrow anywhere from $4,000 to $25,000 with Peerform.


Upstart is a popular P2P platform catering to individuals looking to borrow between $1,000 and $50,000. It offers terms of three and five years, with interest rates ranging from 6.76% to 35.99%, depending on your credit profile. Upstart prides itself on offering next-day funding to the majority of its borrowers and no prepayment penalties if you pay off your loan early. 


Payoff wants to help small business owners and consumers pay off expensive credit card debt. Loans start at $5,000 and max out at $40,000. You can pay off the loan in two to five years and don’t have to worry about any additional costs outside of an origination fee of up to 5% of the loan amount. Interest rates start at 5.99% but can go as high as 24.99%. 

FYIFYI: A P2P marketplace that offers personal loans can still be good for your small business. Focus more on the loan limits, fees and interest rates when shopping for financing.

Can investors make money with peer-to-peer lending?

P2P lending is a great way for accredited investors to make money. The investor looks at several loans with various credit ratings – the higher the credit risk, the more the interest pays out for the investor. 

It’s a smart investment option for online investors, who can earn up to 30% returns by lending money directly to verified borrowers, according to Julia Brookes, consultant for Now Loans. 

“Investors can diversify their investment beyond traditional asset categories to earn returns higher than other sources of investments, such as saving accounts, fixed deposits, corporate bonds, mutual funds, etc.,” Brookes said. “The cool thing about P2P lending is that it does empower investors to make micro-investments across various risk levels (high risk equals high expected return, low risk equals low expected return).” 

Hanif believes that investors feel comfortable on P2P lending platforms because of these major benefits: 

  • Easier approvals
  • Lower fees
  • Saved time
  • Choice of business investment
  • Potential profitable returns
  • Tax efficiency 

Bottom LineBottom line: Investors can make money on P2P marketplaces if they select borrowers who will pay the loan back on time. Otherwise, the investment becomes a money-losing proposition.

Can borrowers make money with peer-to-peer lending?

While investors can easily make money with P2P lending, so can many borrowers. For one, the borrower can make money by using the peer-to-peer loan to pay off their high-interest loans, such as credit card debt, according to Marcus Anwar, co-founder of OhMy. 

“By doing so, they would be saving money by paying low interest on their debt,” Anwar said. “For example, borrowers can be charged anywhere from 16% to 21% on their credit card debt. If the borrower gets a peer-to-peer loan with a lower interest rate of 5% to 9%, then they would be saving all that money by not paying a high interest rate.” 

When done right, P2P lending can be safe and lucrative for both borrowers and lenders. However, as with any other financial transaction, you must review each loan or investment opportunity on its own merits.

Joshua Stowers contributed to the writing and reporting in this article. Some source interviews were conducted for a previous version of this article.

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