Finding money to fund a business through the economic downturn has many people looking for non-traditional sources. Investors looking to make a bigger return have also been looking for alternative places to invest their capital. With this convergence, peer to peer business financing is becoming an increasingly popular way for businesses to get funded and investors to get a better return on their investment.
Loans typically range between $1,000 and $35,000 and interest rates vary between 5.5-27% depending on platform and credit risk.
How It Works
To apply for a loan, prospective borrowers create an online profile outlining what the money will be used for and the amount they want to borrow. Loans can currently go up to five years in length. The benefit to borrowers is the ability to get money when they can’t meet the bank’s lending criteria and don’t have to put up collateral.
Lenders browse the lender profiles and select which borrowers to lend to and how much they will lend with amounts starting at $25. The interest earned is based on the borrower’s credit score. The lower the score, the higher the interest and the lender has the ability to construct a portfolio to spread out the risk among several loans and credit risks.
We worked with a young mother wanting to start a home cleaning business but had terrible credit due to a recent divorce. As such she had no personal assets or savings to put towards the business plus she was needing only $2,000 to get started. When looking for small business loans, low dollar loans can be more difficult to obtain since it takes as much work for the bank to close a $2,000 loan as it would a $200,000 loan and the profit is so minimal that they typically either turn them down or move the customer to a personal loan.
Our client put together a great description of what she was wanting to do with the money and within six hours had all of the money.
Why Get a Peer To Peer Loan?
While credit requirements have become more strict over the past few years, the peer to peer business financing route can be good if the banks won’t lend for your business. Businesses that may best benefit to this type of lending is one’s with a need for working capital but little assets to cover the loan or credit issues.
The biggest benefit in my opinion the peer to peer system is that the lenders don’t always look at the numbers when making loans as many are wanting to help others. This provides deserving people a forum to explain their circumstances and improve their situation.
Where To Find
Right now the two biggest platforms are Prosper.com and LendingClub.com. At this time, these two have built the most sophisticated models and have the most active group of lenders.