There’s a kind of small-business loan that cuts the big banks completely out of the equation. It’s called peer-to-peer lending, and two of the most well-known lenders offering this kind of financing are Lending Club and Prosper.
These so-called P2P lenders match investors looking to lend money and earn a decent rate of return with borrowers looking for a loan at a reasonable rate — whether it’s to refinance debt, to pay for home improvements, to use as a down payment on a home, or for business purposes.
Prosper offers personal loans up to $35,000 that can also be used for business purposes. Although Lending Club also offers personal loans, the company launched a separate business loan platform in 2014 and now offers small-business loans and lines of credit.
As a small-business borrower, here’s what you stand to gain with Lending Club and Prosper: a better shot at loan approval, faster access to capital, reasonable interest rates and terms, and a flexible repayment schedule.
Consider the pros and cons of each lender to help find the fit that’s right for you:
Lending Club vs. Prosper at a glance
Best for a small-business expansion loan: Lending Club
Lending Club has funded more than $11 billion in loans since its founding in 2007, according to the company. About 70% of Lending Club’s borrowers use their loans to refinance existing debt, such as credit cards or student loans.
How to qualify: You must have been in business a minimum of two years, do at least $75,000 in annual sales, own at least 20% of the business, and have fair or better personal credit. Collateral is also required for loans of $100,000 and greater, and borrowers must personally guarantee loans less than $100,000.
Speed: Borrowers can fill out an online application in as little as five minutes and pre-qualify. From there, you are presented with multiple loan offers, and you can accept the offer that best fits what you’re looking for. You then need to supply a few documents to get your loan approved. The approval and funding process typically takes around seven days.
The costs: Lending Club charges 8% to 32% APR on its small-business loans, which includes a one-time origination fee of .99% to 5.99% (paid out of the loan proceeds). Your actual annual percentage rate will depend on your business’s financial strength, your personal credit score, the loan amount and repayment length.
Repayments: Loans are repaid monthly and carry repayment terms of one to five years. You’re required to set up automatic monthly deductions — ACH payments — from your bank account. But you also have the option of paying by personal check, with a $15 processing fee per check.
The benefits: Lending Club offers small-business loans of up to $300,000, which is far more than Prosper and similar online lenders offer, and the funding process is much faster than at banks. As with Prosper, Lending Club gives borrowers the option to repay early to save on interest, with no prepayment penalties. Finally, paying off the loan on time should help you build good business credit, and the interest paid on your loan may be tax deductible, unlike Prosper’s personal loan.
The downsides: Although Lending Club offers competitive rates on its loans, it’s still slightly more expensive than traditional bank loans and SBA loans originated through SmartBiz (7% to 9% APR). Lending Club is also unavailable to borrowers in Idaho and Iowa.
If Lending Club sounds like the right fit, apply on the lender’s secure site:
Learn More(Read our Lending Club review.)
Best for a small-business startup loan: Prosper
Prosper has funded more than $4 billion in personal loans to 250,000 borrowers on its peer-to-peer lending marketplace since its founding in 2005, according to the company. Loans can be used for nearly any purpose, including small-business financing.
How to qualify: You need a personal credit score of at least 640; approval is based on credit score rather than the strength of your business.
Speed: Prosper requires borrowers to fill out an application page and supply basic personal information, which can take as little as a few minutes. If you qualify, your listing is posted on the Prosper marketplace, where investors have up to 14 days to fund a portion of your loan. Borrowers typically get money in two to 14 days.
The costs: Prosper’s loans carry an APR of 6% to 36%, which includes a one-time origination fee of 1% to 5%. The cost of your loan depends heavily on your personal credit score.
Repayments: Loans are repaid monthly over a period of three or five years. Borrowers can set up monthly deductions from a bank account via ACH, although you can also opt to mail in paper checks or pay over the phone by contacting Prosper’s customer support team (processing fee of up to $15 applies).
The benefits: Small-business startup loans are typically very hard to qualify for, as most banks and online lenders require a solid business track record and collateral (such as real estate) to back the loan. Prosper’s loans, however, are based solely on your personal credit score, making it an option for startups that have no sales.
The APR on Prosper’s loans is also very competitive compared with other online lenders such as OnDeck (16% to 98% APR) and Kabbage (20% to 113% APR), which require a business operating history and a certain amount of annual revenue to qualify. You can also repay a Prosper loan early to save on interest, and the company does not charge a prepayment penalty.
The downsides: You can borrow only up to $35,000, which may not be enough for all startups. Since it’s technically a personal loan, your business won’t build any credit history, and the interest paid on the loan won’t be deductible on your business taxes.
Prosper also requires a minimum credit score of 640 to qualify, so it isn’t an option for borrowers with bad personal credit.
Although Prosper doesn’t require collateral on its loans, it does require borrowers to sign a personal guarantee, which means the company can go after your personal assets if you fail to repay the loan; failure to repay is also likely to damage your personal credit score. Prosper is not available to borrowers in Iowa, Maine and North Dakota.
If Prosper sounds like the right fit, apply on the lender’s secure site:
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