How to Start a Peer to Peer Lending Business

Last Updated: February 7, 2023 References Approved

In the wake of the Great Recession, traditional lending institutions such as banks became reluctant to loan money to higher-risk individuals, and peer-to-peer (p2p) lending businesses have risen to fill the gap. These websites enable people to get loans – whether to start a new business or pay off high-interest credit cards – funded by other individuals rather than banks. P2P lending businesses typically operate as marketplaces, connecting borrowers to people willing to lend to them. Building a p2p lending website isn't all that difficult, but starting a p2p lending business that actually stands the test of time is a serious undertaking. If you want to start a p2p lending business, keep in mind that you're not only starting a business, you're starting an extremely high-risk business in a heavily regulated sector.^{[1]
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Part 1

Part 1 of 3:

Building Your Platform

1
Decide whether to incorporate your business. Incorporation will protect you and your initial startup team from personal liability. This is key if you want to shield your assets from creditors if things ever get messy.
- Which entity you choose depends on your team and the level of formality you want. You do not have to do this at all, but it’s generally advised.
- Corporations typically have significantly more formal requirements than LLCs, including record keeping and reporting requirements.^{[2]
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- There are also different tax implications for LLCs and corporations, so you may want to consult an attorney or accountant before making a choice.^{[3]
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2
Register your business name. You typically must register your name with the states in which you plan to do business. The rules for this process differ from state to state, so make sure you follow each state’s process carefully.^{[4]
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- Keep in mind that although your business name may be the same as your domain name, these are not the same thing.
- The state will have a directory of business names, and you must choose one that isn't already registered by someone else in that state.
- Depending on which entity you've chosen, your business name typically must identify as that entity.^{[5]
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- For example, if you've registered as a corporation, your name may be "P2P Lending, Inc." However, if you've organized as an LLC, you must use "P2P Lending, LLC" instead.^{[6]
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3
Register your domain. Choose a domain name that is easy for potential customers to remember.^{[7]
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- There are a number of domain registration services such as Go Daddy or Domain.com where you can not only register a domain but also add email and hosting services as needed.
- Choosing a unique domain name can preserve your ability to trademark the name or a logo at a later date, if you choose to do so.
4
Build your team. In addition to people who know how to operate a website, you should also include team members who have knowledge of banking and financial regulations and know how to run a business.
- Your team should include at least one attorney who has experience navigating state and federal regulation of the lending sector.^{[8]
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- Don't scrimp on software engineers and tech assistance. You must have dedicated team members who can react quickly to resolve any problems that may arise.^{[9]
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- You can also consider bringing someone on your team who has education and experience in marketing and advertising.^{[10]
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- Someone with strong relationships in capital markets and banking can be valuable in helping you raise the initial capital you'll need to get your p2p lending business off the ground.^{[11]
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5
Raise initial capital. In addition to running your website and other operating expenses, you'll need money to borrow to your first customers before p2p investors start putting up money. Even though you'll be in the business of lending money to other people, it's important at this stage to understand your credit score and credit history, because that will determine how much initial capital you can raise and what investors are willing to work with you.^{[12]
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- How much money you'll need will depend on how many loans you need to finance on your own before you can secure financing. Just know, this could take some time.^{[13]
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- You will need to use this money to establish a relationship with an originating bank, which will be the bank through which all of your p2p loans are serviced.
6
Invest in p2p lending software. Although you could build your system architecture from scratch, it probably makes more sense to subscribe to an existing program. There are a number of web development companies that offer either raw codes and scripts that you can adapt to your system.^{[14]
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- Other companies have more plug-and-play type system solutions, providing you with an entire platform that you simply customize with names and titles to suit your needs.^{[15]
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- You could check out Zidisha. They’re a p2p organization that has released the source code of their entire platform under an open-source license for anyone to use.^{[16]
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- These software solutions automate many of the processes you'll need, including the application and screening processes for borrowers and security and protections for lenders.^{[17]
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7
Design your website. Your final product should be intuitive, easy to understand, and easy to navigate for both lenders and borrowers. Some of the p2p lending platforms include basic web design, but you'll want to adapt and customize this to make your site stand out in the field.
- Make sure that your services are clear. If someone comes to your site and wants to apply for a loan or become a lender, the steps should be obvious.

Part 2

Part 2 of 3:

Complying with State and Federal Regulations

1
Hire an attorney. If you haven't already, hiring an attorney is imperative if you want to avoid running afoul of the many complex securities and banking regulations that affect p2p lending. There are many businesses you can start without necessarily needing an attorney, but a p2p lending business is not one of them.
- If you intend to enter this sector, you should have legal counsel in place before you sign the first loan agreement.^{[19]
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- Every transaction in this field is subject to extensive regulation, and many of these areas of law are constantly changing as lawmakers catch up to this new industry.
2
Work with financial and banking professionals. Finance and consumer credit professionals can help you ensure all your policies and procedures stay up-to-date and in compliance. If you haven't already, hire someone with extensive education and experience in the banking sector.
- Ideally, aim to add someone to your team who has years of senior or upper-level management experience in a financial institution.^{[20]
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- Experienced finance investors can put systems in place to effectively score your borrowers and lower the inherent risks involved with p2p lending.
- Laws like the Electronic Fund Transfer Act, the Fair Credit Reporting Act, and the Bank Secrecy Act, will likely apply to your p2p lending business.
3
Establish anti-discrimination policies. Federal consumer credit laws forbid the use of certain discriminatory practices in lending. The Equal Credit Opportunity Act establishes guidelines you must follow when you gather and evaluate your borrowers' credit information, as well as the content of the written notification you must provide if you deny credit.
- This is key because many of the borrowers you work with are coming to you because they were turned away from traditional lending institutions.^{[21]
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- It’s imperative that you develop a process to screen and qualify borrowers. However, your screening process cannot disqualify or penalize people for unlawful reasons such as race, sex, or religion.^{[22]
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4
Draft a comprehensive loan agreement. Your loan agreement generally must comply with the federal Truth in Lending Act, which establishes uniform methods for disclosing credit terms.
- All terms should be laid out in writing explicitly, in words that your customers will understand.
- You can use the terms and conditions from traditional bank loans as samples to guide you, make your loan agreement your own and tailor the terms to suit your product.^{[23]
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- Using traditional bank terms as a guide also can help ensure that you're meeting the requirements of federal law by including certain conditional language and types of disclosures.
- You can make money off of more than just interest (just like normal banks). Your loan agreement should include fees or penalties for late payments or insufficient funds.^{[24]
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5
Evaluate state and local regulations. Apart from federal regulations, your state may have additional registration and filing requirements for p2p lending institutions. Since each state's requirements will differ depending on the size of the loan being made, the length of the loan, and the interest rates and fees, you might consider reviewing these regulations to determine which states it makes the most sense to exclude.^{[25]
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- Keep in mind that you must make sure you have the appropriate licensing in every state in which you anticipate brokering, making, or servicing loans.^{[26]
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- State licensing requirements typically include certain bookkeeping and reporting requirements, minimum net worth, and the posting of a surety bond.^{[27]
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- Make sure you clearly display at appropriate places on your website the states in which your services are not available.
- Using an established bank can be efficient in getting you around all these individual state licensing requirements.^{[28]
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6
Consider partnering with a bank. Partnering with an established bank may allow you to offer a broader variety of loan and investment products.^{[29]
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- Partnering with an existing traditional bank also solves many of the regulation problems involved with your loan products, since the bank will already have compliance procedures in place.
- Given that you are a newcomer to the scene with no operating history, potential lenders may feel more comfortable investing their money if you are backed by a reputable bank.
- Keep in mind that typically you will need an originating bank to initiate loans and issue notes to your private investors who have agreed to fund the loan.

Part 3

Part 3 of 3:

Attracting Investors

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Develop a unique angle. Because there are so many p2p lending companies out there, you must find a way in which what you have to offer is different from all the others if you want to stand out.^{[30]
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- For example, you might choose to focus your business on just one type of lending, such as loans for people who want to pay off or pay down their student loans.
- Many p2p lending companies start with personal loans and move towards small business loans.^{[31]
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  Research source} For example, you could expand to small business loans for people who want to open restaurants.
- The p2p lending market is extremely competitive. It will really help to set your service apart from the crowd. Focus your marketing efforts on what makes you unique.^{[32]
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2
Create informational documents. Corporate and financial projections can be used to educate potential lenders and borrowers alike about the value of your service. You will potentially need to file certain documents with the SEC, including a yearly prospectus, sales reports, and other filings. Providing open access to these documents on your website will attract prospective investors who want more information about your company's financial structure and health.^{[33]
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- Other business planning documents can help legitimize your p2p lending business in the eyes of the public and make potential investors more comfortable working with you.
3
Seek out press coverage. Press attention can be an efficient and cost-effective way to draw attention to your business. Press attention (along with word-of-mouth) may be the best way to attract investors willing to lend money through your business. Because p2p lending already carries inherent risks, investors will be more likely to use your service if an established authority speaks highly of it.^{[34]
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- You might consider starting by reaching out to popular and well-respected financial or business websites.
- Bloggers for business websites are under a lot of pressure to produce content, and often are looking for up-and-coming businesses to write about.
4
Advertise to borrowers. If you advertise to borrowers first, lender-investors looking to expand and diversify their portfolios will naturally follow.
- Most of the existing p2p lending businesses have had less difficulty attracting investors than attracting qualified borrowers, leading to greater available investor money than there is borrower demand.^{[35]
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- Having a unique angle allows you to focus your advertising on the particular borrowers you're seeking to attract, which can save you money compared to broader campaigns.
- Maintaining an active presence in social media can help you build your business using word of mouth.