Peer-to-peer lending companies have been operating in the United States for about three years now. Companies such as Prosper.com and Lending Club are providing loans funded by individuals as an alternative to borrowing from banks in hopes of providing investors better rates of return on their money and by giving borrowers better terms and interest rates on the loans that they take out than they would be able to get from banks.

From a borrowing perspective, getting a loan from Lending Club is a lot like getting a loan from a bank. You start by filling out a loan application online and then Lending Club will instantly review your credit and tell you what interest rate that they are willing to provide you a loan for. After receiving an offer from Lending Club, you then provide some additional information about your employment situation and the purpose of your loan.

After you complete your loan application, your loan will go into a 14 day funding process where potential investors can opt to partially fund your loan. They will also have the opportunity to ask you questions about your financial situation and about the purpose of the loan to determine whether or not they want to invest.

If your loan is fully funded before the two week funding period is complete, Lending Club will take the funds out of the investors lending club accounts and transfer the funds to you. At this point you have the principal balance of the loan and are free to use it however you would like. If the loan does not become fully funded after two weeks (this rarely happens), then the loan process is cancelled and the borrower won’t receive a loan.

30 days after receiving your principal balance via electronic transfer, your first payment will be due. Lending Club collects payments via ACH electronic transfer. Lending Club will then take your payment out of your account on the same date each month via electronic transfer for a total of 36 months until your loan is fully repaid.

The process of getting a loan on Lending Club is fairly straight forward. You fill out an application process, and instead of convincing a bank that you are credit worthy, you are convincing individual investors that you are credit worthy.

When any company comes forth claiming to offer a new product or service that’s more competitive than its predecessors, consumers quite often look with skepticism, especially in the financial services industry. Many companies have purported to offer new asset classes of investments claiming higher than average rates of return and many of those investments have either turned out to lose investors money or turn out to be scams all together.

When peer-to-peer lending companies first came onto the scene in 2006 and 2007, many looked with skepticism. Prosper and Lending Club were essentially setting up investments without the oversight of the Securities and Exchange Commission (SEC). At the time, Lending Club and Prosper said what they were doing was completely legal because they were only acting as a facilitator between borrowers and lenders setting up loans. The Securities and Exchange Commission disagreed.

Eventually, the SEC filed suit against Prosper and Lending Club for selling unlicensed securities in violation of the Securities Act of 1933. Both Prosper and Lending Club went dark while they dealt with their legal issues. After a several months, both companies settled with the SEC and agreed to register their investments with the SEC. Since then, both companies have completed their SEC registration and have each filed a prospectus.

Although both companies did have some issues with the SEC, the idea of peer-to-peer lending is a perfectly legitimate concept that both Prosper and Lending Club are now legally practicing. From a legal perspective Lending Club and Prosper.com are not a “scam.”

Some of Prosper.com’s early investors have ended up getting lower than expected rates of returns and some have even lost money on their investments, but that’s more a result of investors bidding too low of interest rates and higher than expected default rates than any failure on the part of Prosper. Investors on Lending Club have fared better than their competitors on Prosper so far.

There are some long term questions about the viability of peer-to-peer lending because of the relatively high default rates that investors are seeing, but some of that may be a result of the industry perfecting who it should originate loans to.

At the end of the day, both Lending Club and Prosper are offering legitimate lending services that are regulated by the U.S. government.

If you have a small business and need some operating capital or capital to expand your small business, it can quite often be very difficult to find funding. Typically funds from angel investors or from venture capitalist require a lot of groundwork and meetings and business loans from banks usually come with less than favorable terms. Fortunately, there’s a newer type of loan, called a peer-to-peer business loan, that can provide business owners with loans of $5,000 to $20,000 without a ton of hassle.

There are two peer-to-peer lending companies that offer peer-to-peer business loans in the United States, including Lending Club and Prosper. Small business owners can use these services to create loan listings for small business owners, then individual investors can choose to fund part of the loan that the small business needs. After a funding period, the peer-to-peer loan company will collect the funds from the individual investors and provide the funds to the small business owner.

The peer-to-peer business loans that Lending Club and Prosper facilitate typically amortize over a period of 3 years. The interest rate that borrowers can get will depend largely upon their credit rating, but interest rates will typically be between 8% and 20%. Borrowers will also be charged between a 1% and 3% one-time origination fee.

The terms of the loan are pretty similar to what small business owners would have to pay if they got a regular loan from the bank. With peer-to-peer business loans, there are likely fewer options in terms of repayment schedules, but these types of loans do allow you to get financing with much less hassle and often on a shorter notice than you would with a traditional bank loan.

Certainly the best option for your small business is to operate on a cash basis and pay expenses with the revenue that you receive, but in some situations, such as for businesses that are just starting up, that’s not always an option. If you do need a small to medium sized loan for your small business, a peer-to-peer business loan can be an excellent option.