If your small business is in need of a loan, but doesn’t have a credit profile that wins instant approval from the banks, the next step is usually applying to an alternative source of funds such as peer to peer lending.
Instead of applying to an established financial institution for a loan, you make a proposal to borrow from a collection of individuals who, if they accept your offer, subscribe to your loan request in amounts as little as $25. In return for their risk taking, he or she receives an attractive rate of return on their money based on your credit profile as determined by the company that administers the lending platform – Prosper or Lending Tree for example.
Qualifying for a loan
Although the loan proceeds can be used for any purpose related to your business, the loan is made on a personal basis and doesn’t take into account the assets or cash flow of your business. Since personal credit history is the sole criteria used to determine credit worthiness, a rejection rate of up to 90% is common for most peer to peer lenders.
While traditional lending sources such as banks or credit unions take up to a month to approve (or reject) your loan request, most peer to peer lenders employ “automated decisioning” software that either accepts or rejects your loan application almost instantly. Once approved, most peer to peer lenders are able to fund your request in as few as five days.
According to a recent article in the Wall Street Journal by Ianthe Jeanne Dugan: “Many applicants wash out in the vetting process. Those who are approved are quoted an interest rate based on the credit risk. Lending Club says annual interest rates range from 6% to 26%, with the average rate for a 36-month loan around 13%. Prosper says rates range from about 6% to 35%.”
Borrowers are also charged an origination fee of 1% – 5% of the loan amount based on credit risk.
Payments are a fixed amount with terms up to 36 months.
Is peer to peer lending a good way to borrow funds for your business?
The peer to peer model is worth considering as an option as long as you have very good credit and can come up with the fixed monthly payment when business is slack. After all, peer to peer lending is geared toward consumers and not business owners.
A better choice for most business owners is any one of a number of alternative funding firms that specialize in business loans or merchant cash advances to businesses in a wide variety of industries.