Peer-to-Peer Lending – An Alternative to the Traditional Bank Loan

Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.

Thanks to the Internet and quick-thinking entrepreneurs, banks are no longer the only source to which small business owners can turn for a loan. Peer-to-peer (P2P) lending enables small business owners to borrow money from strangers, while still maintaining the structure of a bank-originated loan.

P2P lending websites enable investors and banks to back loan requests submitted by prospective borrowers. Investors and banks electing to back a loan request will earn a percentage of the interest (less fees) as the loan is repaid. It can provide a nice stream of passive income for individuals desiring to support others, while also serving as a useful tool for business owners seeking capital.

From a small business perspective, P2P lending provides an alternative to credit cards and bank loans. Although structured in the manner of a traditional bank loan, it may be easier for some businesses to secure a P2P loan. Noteworthy, too, is the fact that many loan sites offer lower interest rates than commonly available with credit cards.

Most of the loans originated on P2P sites are unsecured loans, meaning that there’s no collateral involved in the transaction. Additionally, there are fewer regulations than typically encountered with SBA-backed loans.

Improving the Likelihood of Approval

Before applying for a loan, take the following steps to maximize your likelihood of approval:

Review your credit history and correct any errors.

Understand your FICO score and verify that it’s within the acceptable range for your specific P2P lender.

Don’t apply for every loan or credit card.
Rather, be selective and limit the number of inquiries on your credit report. Having too many inquiries on your record will create a negative impression on prospective lenders.

Understand how much money you need.
Each P2P lending site will offer a range of available loan sizes. Additionally, in order to qualify for larger loans, borrowers must have excellent credit standing. Also, loans for relatively lower amounts will generally have correspondingly lower interest rates.

Know when you’ll be able to repay the loan.
You’ll be required to make monthly payments on your loan. Each lender will offer their own terms, however, most will originate shorter-term loans with comparatively lower interest rates.

Check that your state is covered in the fine print.
P2P lending is not available in all states. Before investing too much time and effort in this area, take care to ensure that the P2P lender in which you’re interested will accept borrowers from your state.

Most sites will permit you to check your interest rate prior to applying for a loan. This can be useful during the process of determining which site may best meet your overall requirements. The sites state that they run a “soft” check on your credit history, which will not result in an inquiry being filed against your credit report. Each “hard” check (such as an actual loan application) will decrease your credit score by two points for a period of 6-12 months.

While I don’t endorse any particular P2P lending site, I want to offer some basic knowledge to help readers better understand the P2P lending landscape. The following are some of the most popular P2P lending sites:

Lending Club

One of the oldest P2P lenders, Lending Club permits small businesses and individuals to borrow between $5k-$300k. Currently, only about 1.58% of originated loans have been utilized for business purposes.

Lending Club offers fixed-interest loans with terms ranging from 1-5 years. Each loan features a fixed monthly payment and no prepayment fees. There are, however, origination and late fees. Lending Club touts its quick decisions and its ability to transfer money directly to your account.

To qualify for a Lending Club small business loan, an applicant must own at least 20% of the business, have no recent bankruptcies or tax liens, and have fair-to-great personal credit. The business must be at least two years old and have annual sales of no less than $75,000. Lending Club doesn’t require a business plan, collateral for loans under $100k, or a site visit.

These rules may seem to disqualify startups, however, it may be possible for individuals to qualify for a personal loan and then channel funds to their business.


The first P2P lender, Prosper issues loans to entrepreneurs based on their personal credit. These are personal loans intended to help entrepreneurs build their businesses, however, the entrepreneur is personally liable for the debt.

Prosper originates loans ranging between $2,000-$35,000. Their loans have fixed-terms of either 3 or 5 years and have no prepayment fees. Loan proceeds are deposited directly into your account.


Founded by former Google employees, Upstart introduces additional factors into the loan approval process. In addition to your FICO score, they’ll review your education, your job history, your area of study, and your credit report. Upstart covers all states except West Virginia. Upstart’s loans range from $1,000-$50,000 and run for 3 or 5-year terms with no prepayment penalty.

Funding Circle

After having trouble securing funding for their small business, the entrepreneurs behind Funding Circle felt that the traditional banking system was failing small business owners. They created Funding Circle as a means of serving small business owners in order to help more businesses to succeed.

Funding Circle offers loans from $25,000-$500,000k, the most of any P2P lender with which I’m familiar. Their terms range from 1-5 years. Funding Circle states that potential borrowers can receive a decision in as little as 24 hours and be funded in ten days. They have no prepayment penalty.

Kiva US

Kiva, well known for supporting small businesses in third-world countries, has begun to focus on the small business sector in the United States. Currently, Kiva’s website offers crowdfunded loans of up to $10,000 at 0% interest for qualified businesses. To be eligible, businesses cannot be in bankruptcy or engaged in multi-level marketing, direct sales, illegal activities, or investing. Borrowers must also show that they have friends or family willing to back their loan by sharing their profile and having them lend money through the platform. Once borrowers have successfully met this requirement, their loan will go live on the public site and other individuals will have the ability to further fund the loan. Should the loan be fully funded, the proceeds will be disbursed within 5-7 days via Paypal.

Kiva US is similar to crowdfunding, however, the money must be repaid – clearly making it a loan. Kiva requires monthly repayment through Paypal.


Peer-to-peer lending is still relatively new when compared with other forms of credit. While there’s definitely room for improvement, these sites currently help individuals who may encounter difficulties in securing a traditional bank loan. Additionally, those individuals with excellent credit may find that they can obtain a better rate with a P2P lender versus a large bank. Because they don’t require a business plan, P2P lenders feature a more streamlined process. It’s important to note, however, that regardless of business structure, the borrower is personally responsible for the entire loan amount.

About the Author

Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (

Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.

Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to