Founded in San Francisco in 2005, Prosper is a company built around a type of loan service called peer-to-peer lending. This process works by allowing individuals to either invest their money in personal loans or to borrow money through Prosper’s website. Since their launch, the company has loaned more than $4 billion through its 2.2 million members.
Originally, Prosper operated in a fashion similar to eBay, providing loans through online auction system, where both lenders and borrowers decided on a loan rate. However, beginning in 2010, they changed their business model toward using pre-determined rates based on an in-house formula. Instead of deciding on a loan rate, lenders use Prosper’s pricing model. The pre-set rates are based on a borrower’s credit rating and financial well-being.
Prosper certainly offers a unique opportunity, since individuals can both invest and borrow through the same system. Loan amounts can range from $2,000 to $35,000 for each loan request, and while this is not the widest range of loan amounts out there, it should cover many costs for small businesses. Though the marketplace might seem like an extra level of complication, Prosper fully handles the servicing of loans, collecting and distributing payments and interest, so the marketplace really doesn’t add much extra work for either borrowers or lenders.
With the marketplace, borrowers create and post a listing with the amount they wish to borrow along with the rates and terms set by Prosper. Investors then browse the loan listings and choose to invest in whichever listings meet their own personal criteria. Benefits of the service include:
The key to Prosper’s rates and terms is their proprietary Prosper Rating, which is a system that assigns a risk rating to borrowers based on a number of factors, chiefly credit score and financial health. Basically, borrowers are assigned a rating of AA, A, B, C, D, E, or HR (for “high risk), and rates and terms are set according to that rating. This rewards borrowers with good credit and finances, and the rates and terms for AA ratings are really quite good. In fact, current borrower APR for an AA-rated borrower can be as low as 5.99% over 3 years, which is one of the lowest loan rates on the market.
Loans at Prosper have no prepayment penalties, so borrowers are free to pay them off in full at any time. There are also no fees for posting a borrower listing on the marketplace. Fees are only taken out once money is transferred to the borrower. AA rated borrowers also get a really good rate on the origination feed, as low as 1% for a 3-year loan or 3% for a 5-year loan. Prosper makes its money through the origination fee of the borrower and a servicing fee of 1% per year from the investor.
All loans through Prosper are unsecured, which means there is never any collateral. This is great news for small businesses that are looking for start-up financing or needing to purchase new equipment that might not have much property to put up as a guarantee.
The range of funding available through Prosper is fairly small, ranging only as high as $35,000. And while this is good for things like renovations and buying new equipment, it probably won’t be enough for bigger projects and expenses like major expansions. As far as start-up costs go, these funds are suitable for small business start-ups but probably nothing too big. Limitations of the service include:
It should be said that although Prosper offers some good rates and fees, these are only really available to borrowers who qualify for an AA Prosper Rating. The jump from an AA rating to an A rating is significant, with the borrower APR minimum doubling from a 5.99 percent to 10.28 percent. For high risk borrowers, the APR minimum is 31.72 percent on a 3-year term. And although AA-rated borrowers can pay an origination fee as low as 1 percent, everyone from a B to an HR rating will pay 5 percent. In other words, unless you get the highest rating, the rates and terms available through Prosper really aren’t very good.
Confusing Rates and Terms
The Prosper Rating chart is fairly convoluted and might be daunting for many potential borrowers because there are so many ratings and such a wide variance among the numbers, particularly in regard to interest rates. Of course, this variability exists because individual investors are allowed to decide how much of a risk they want to make in accepting loan offers. However, the big charts might scare off some small businesses that are looking for a simple and straightforward loan process.
High Credit Scores Required
New prospective borrowers must have a credit score of at least 640. Return borrowers only need a score of 600. Credit score plays a huge role in determining where a borrower falls on the Prosper Rating chart, and the minimum requirement is a bit higher than many other loan companies. For sure, companies with shaky credit are going to want to look elsewhere for funding, and those who barely qualify might want to look elsewhere anyway.
Borrowers must reside in one of 45 states, excluding Vermont, Pennsylvania, Iowa, Maine and North Dakota. It is unclear why those five states are not permitted to borrow, nor is it clear if Prosper will expand its services into these places at a later date.
Length of Process
The marketplace system at Prosper creates a degree of uncertainty in terms of how long the loan process will take. Borrowers can only upload loan offers and wait for an investor to accept it. Even for a borrower with an AA rating, there is no guarantee of how long this will take. Consequently, businesses looking for quick funds for an immediate project might want to look somewhere else.
*Star Rating is determined by evaluating APR range, minimum credit score requirement, revenue requirement, length in business requirement, and other related approval data.