P2P lending is not be confused with Crowdfunding, which is not based on loans. Instead, Crowdfunding uses an internet platform to raises capital in the form of donations from the “crowd.” The money is not required to be paid back, but often special deals or promotions are promised to the donors in exchange for their donation. The problem with Crowdfunding is that the business owner must raise 100% of the donation goal in order to receive any of the funding, so if the Crowdfunding campaign falls short of the goal, even by a few dollars, the business usually won’t receive any of the donations.
P2P lending, also referred to by some as cloud lending, works by providing an online lending platform that links investor, known as lenders on the P2P platform, with borrowers looking for a loan. Borrowers complete an online application and they are provided with a quick loan decision. Some platforms like OnDeck.com use a proprietary credit-scoring model to give applicants a loan decision within minutes. The borrower can get funding in as little as one business day. Other lenders like Kabbage.com, who specializes in online merchants and e-commerce businesses, claim to screen loans using real data, not just a quick score. Regardless, the loans are made to the small business either by matching one investor per small business loan or by pooling the private money and then having the P2P lending platform make the loan. (If you are interesting in becoming a lender, check the particulars on the lending platform to determine if you get to select which loans, whether your money is pooled with other investors, typically what the default rate is, and who performs the collection process.)
Although the interest rates and fees are often higher than a small business might get from a traditional bank, the ease of the application process and relatively high approval rates make P2P lending an acceptable option for fast cash for small business who have been turned down by other lenders.