Thanks to the Internet, we now have such applications as peer-to-peer file sharing, peer-to-peer tech support, and peer-to-peer fundraising. A new online activity that's gaining traction among small businesses is peer-to-peer lending. 

 

While small business lending is up - another sign of life in the slowly recovering U.S. economy - the stagnant years preceding this recovery were difficult for small businesses. Banks were tight with loans and many companies found themselves shut out, unable to expand or replace aging equipment. During that time, many companies found success with a different type of loan.

 

The practice dates back to 2006 with the launch of the first peer-to-peer loan company, Prosper. Today, there are many more players. LendingClub is world's largest peer-to-peer lending platform, with Prosper in second place.

 

Peer-to-peer lending is a fairly simple concept. It involves using the Internet to link borrowers and lenders for loans of relatively small amounts of money, usually up to about $35,000, at competitive rates and for short terms. Investors receive good rates of return, and small businesses and individuals get access to the money they require to take advantage of business opportunities.

 

It works like this: borrowers provide their credit information, the purpose of the loan, and the amount they require in an application process. Investors evaluate the company's credit worthiness and, if they suspect a good bet, they provide some part of the amount required. For some small loans, the investment could be as little as $25. Once the amount requested is met, the loan is granted and then paid back just like a traditional loan. The interest rates are set by the peer-to-peer lending service.

 

The model is appealing because the interest rates are competitive with, and often lower than, traditional banks, and returns run between 5 and 15 percent - better than many investment opportunities available today.  (This blogger, something of a peer-to-peer lending skeptic, prepared an interesting table of averages for peer-to-peer lending that is worth a look.)