Peer-to-Peer Loans: A Guide for Small Business Owners

The peer-to-peer lending market addresses a gap in the credit cycle by allowing independent lenders to finance small loans. Peer-to-peer loans are advertised as business loans in small amounts. However, they are actually unsecured personal loans using a business owner's credit as the basis for the debt. As a result, the process for seeking the loan and filing the loan will be different from corresponding processes for standard business loans.

Peer-to-Peer Loan Markets

The most common place to shop for a peer-to-peer loan is a lending website. A number of websites have been set up just for this purpose. A website takes a small cut of the loan in exchange for matching a lender and a borrower. The lenders on the site are small, independent financiers, not large lending houses. As a result, the website serves as their primary means to broker loans. If you do not want to search online for your peer-to-peer loan, consider contacting your state's Small Business Administration to ask for a list of peer-to-peer lenders in your area.

Submitting a Bid

Once you have a list of lenders or have found a brokerage site, you must submit a bid for your loan. While traditional lenders will review your application and submit a bid to you, peer-to-peer lending works in reverse. You list how much you need, and you tell lenders what interest rate you are willing to pay. Peer-to-peer loans rarely provide more than $30,000 in funding, and they are usually offered at high interest rates. Keep this in mind when you submit your bids to lenders. Once you have submitted your bids, await further questions from lenders. They will compete for your loan in this initial step.

Securing a Loan

Once you have several competitive bids, it is time for the peer lender to engage in underwriting. This is similar to traditional lending, and the peer lender will want to evaluate your credit, ability to pay and business plan. You may ask for a non-refundable deposit on the loan prior to this step to ensure the lender will offer you a competitive bid. Otherwise, you are at the mercy of the lender in determining whether you can secure your funding. Remember: the loan will be extended to you personally, not to your business. Without any collateral, the lender is simply reviewing your financial standing and assets in order to deem you creditworthy.

Watching your Credit

Since the loan is written in your name, you are ultimately responsible if things turn south. This means you will may be at risk of financial repercussions, including financing penalties, credit score drops and even asset loss if you cannot repay the debt on time. Even if you pay the debt, for the period the loan is active, you will have a large debt on your credit report. This can render you ineligible for future loans from other private lenders.