Your guide to peer to peer lending

Get a Small Business Loan Through P2P Lending

by Peter Renton on January 19, 2011

Of the almost 60,000 loans that have been originated through Lending Club and Prosper in the last five years we know a good portion of them have gone to fund a small business. The official numbers are around 3,500 loans or 6% of that total.

These are 3,500 businesses (there are likely more than that because not everyone states their exact loan purpose) that might otherwise not have been able to get a loan. With the excruciating tight lending standards of the last couple of years most small businesses have been left out in the cold. And with falling home prices, people have not been able to fall back on home equity lines of credit like they did in the past.

Small Business Credit is Almost Non-Existent

Getting credit for a small business, particularly a startup business is never easy. I know the pain of this first hand. As a startup business owner in the early 1990’s I was desperate for money. No bank would lend to a business that had no history and I couldn’t get a personal loan either. So, I resorted to that most convenient (but expensive) of funding tools: the credit card.  I remember one month I couldn’t make payroll, so I took out a $7,000 cash advance to tide me over. I don’t remember the interest rate but I am pretty sure it was well over 20%.

This $7,000 was what I needed to get through a difficult period, but this story has a good ending. With this money I was able to get the business cash flow positive and we became a nice profitable little business, which I sold in 2005 to help fund a new business I had started. But for a while there, things were very much touch and go. I paid off the credit card in about a year and have never had to use that kind of funding again. But it would have been great to have had the option of peer to peer lending back then. It could have saved me hundreds of dollars in interest and made success that much easier.

P2P Lending May Be a Business Owner’s Best Option

Last week reported that peer lending is growing as a business owner option. It gave the example of an entrepreneur who owns a car wash and needed a $16,000 loan to expand his business. When he was turned down by his bank, he sought out p2p lending with Lending Club where he received his $16,000 loan. More businesses are turning to peer to peer lending these days because they really are an entrepreneur’s best option. If you have decent personal credit you can get a loan, because both Lending Club and Prosper lend to the individual and not the business. Of course, if your business goes belly up you are still on the hook for the loan, but the same would be true if you funded the business with credit cards or a personal loan.

Most startup businesses are starved for cash. A few years ago Inc. magazine reported that half of all start-ups are financed with credit cards. With the tight credit markets of today I would guess that number is even higher now. The biggest problem with credit cards is the high interest rate, it can cripple a start-up business that is trying to get established. A much better option is a three or five year loan from one of the p2p lenders, Lending Club or Prosper. You can obtain loans for up to $25,000 and interest rates for borrowers average around 12%, with lower rates available for people with excellent credit.

If more entrepreneurs used p2p lending for financing their small businesses I am sure we could reduce the number of business failures. Often all a small business needs to get over the hump is a little extra cash. And if they can pay this money back at a reasonable interest rate that will only help their chances of long term success.

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Aaron January 19, 2011 at 4:33 pm

Yes. P2P lending seems to be a good place to get a small business loan. There are a lot of people out there willing to lend to them.

I personally do not lend to these people. While it may be good for small businesses to raise capital, it is a probable nightmare for lenders. When it comes to business loans, the historical ROI is -7.15% (Prosper) and -3.16% (lending club). I obtained this data from It is the worst of the worst of investments on the two sites.

I am guessing this is due to the fact that 9 out of 10 businesses fail within their first 5 years. This isn’t a good percentage to begin with. Plus you are dealing with the problem that most of these business loans are explained in the broadest of ways. When you are looking at a business loan, the individual’s “personal income” matters a lot less. Investors need to look at the business’s books and confirm a good cashflow. Plus lenders need to know the particular market this business is in (location, competition, how many years established, population increasing or decreasing, walmart moving in area, etc.) and be able to confirm this information. All this information is never provided by the borrowers on the site. I doubt the borrower will even give out a name of the business. I believe this is a matter of policy by the p2p lending sites because they don’t want anyone contacting the borrower themselves. Loaning to small business, in my opinion, is just too risky. If the business goes under, so does the money lent. Credit scores are not a great indicator when it comes to these loans.

Peter Renton January 19, 2011 at 5:43 pm

Aaron, It is true that as a whole small businesses have historically been a poor category to invest in on Prosper or Lending Club. In my opinion this doesn’t mean you should never consider them. You mentioned lendstats, which I am a huge fan of by the way, and they also demonstrate some simple filtering (using the business filter) that turns the -7.15% on Prosper into a 9.07% return and a -3.16% return on Lending Club into a 9.68% return. So I wouldn’t just assume that all business loans are a bad investment. I will have more about Lendstats in my next post.

Mike January 19, 2011 at 7:23 pm

I also do not invest in this category of loans. I think the odds are stacked against the new business succeeding. I also avoid loans to pay medical bills, as that is the most common reason for personal bankruptcy in this country.

Dan B January 19, 2011 at 8:00 pm

I think that the best advice for borrowers that are really intending to use the money to start a business or to pay for medical expenses is to put something else down on their application. Although I believe that a lot of people lie anyway, I can’t imagine anyone who would want to use these 2 categories as lies. Therefore I’m inclined to believe that borrowers who put these 2 down are really going to use the money for the listed purposes & like many lenders, I’ll just pass.

Aaron January 20, 2011 at 12:01 am

Indeed Peter. Using a filter like business filter may make a difference. The issue I see here, however, is that the filter *dramatically* reduces the pool that is the “business loan pool”.

On the Prosper site the filter stipulates that you must earn more than $50,000, have a DTI less than 30%, have NO previous delinquencies, have more than 9 credit lines, be using less than 80% of your revolving credit balance (almost never the case), and be requesting less than $20,000. These criteria really drop most candidates off the cliff. For Prosper there were 2,598 loans classified as business that all together yield -7.15%. Using the filter above to achieve your 9.68% return, there would only be 180 left. That means you would have to deny 93.07% of small business borrowers their loan and this is ON TOP of the listings that prosper denies themselves. For lending club this would amount to a 85.44% denial. Not as bad, but still pretty steep.

I know that there will still always be some investors that will be more than happy to throw their money at the small business loans. I am just giving you some food for thought.

*All data from are from today 1/19/2011 at 11:30 PM CST*

Aaron January 20, 2011 at 12:08 am

Also keep in mind that these numbers only include listings that were FUNDED. I’m not even talking about the listings that faded from existence when not enough investors jumped on it.

Dan B January 20, 2011 at 11:55 am

Additionally, it’d be interesting to see how the various filters were arrived upon. Looking backwards & applying filters to improve returns can be rather misleading, especially if they reduce the number to a small sample size.
It’s like a meticulous sports bettor who reviews his 10 year losing record & finds out that he would have been a winner if he had only placed his bets on Wednesday & Thursday nights……….& only if he had pizza for dinner on those nights!

Peter Renton January 20, 2011 at 2:52 pm

Good points gentlemen.

@Mike – I understand you not wanting to invest in businesses and medical expenses. As someone who has owned several small businesses I am always prepared to give them a look. Doesn’t mean I will fund them all but I am happy to kick in $25 if it looks ok.

@Dan B – If every investor was as discriminating as you and other readers of this blog then I could see borrowers being tempted to hide a business loan but you can see that many loans do get funded. The fact that as a group they underperform is a concern and speaks to the need for more due diligence and stricter underwriting for this kind of loan. And I take your point about the filters, you need a decent sample size for backwards filtering to have much value.

@Aaron – fair point. If you take the pool from 2,598 down to 180 that doesn’t leave many loans to invest in. But I still think filtering is a great way to reduce your risk. There will be more on that in tomorrow’s post.

Tyler Smith February 1, 2011 at 5:15 pm

I agree with all of you that lending to start-up businesses is quite risky. While companies like Prosper and Lending Club allow borrowers to post business loans, their platforms are not adapted to deal with business loans (business borrowers normally submit a business plan, financial statements, company asset description, etc when applying for a loan), which can induce lenders to make ill-advised investment decisions.
I recently ran across a company that specializes in peer-to-business lending, Even though the company is new, they developed a model that adequately screen businesses in order to select only creditworthy borrowers, reducing considerably the investment risks. Rebirth Financial also resolves the problem inherent with Prosper and Lending Club, by posting all financial statements and business plans associated with the borrowers business.

Peter Renton February 1, 2011 at 5:40 pm

@Tyler, you have jumped the gun on me. I actually have a phone call tomorrow with the CEO of Rebirth Financial. Hope to have a blog post out next week about them. They certainly have an interesting business model, unique among p2p lenders as far as I can tell.

Marc Dangeard March 24, 2011 at 7:29 pm

If you are interested by another option for funding, we are now raising a Mutual Guarantee Fund that will make access to funding more democratic. Check out and if you like the idea, please contribute.

rajesh thapa August 5, 2011 at 5:52 pm

Do you extend services of lending to Nepal. If so, what are the regulations and rules. Many thanks

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