Peer-To-Peer Lending and Your Small Business

Before the internet, before computers, before the stock market, businesses still needed money. Terms like ‘Barter’, ‘Partner’, or even ‘Susu’ were a critical part of the financial vernacular. With the advent of the internet, so much has changed. Here is one such major change – “Peer-to-Peer Lending”. This form of financing has drastically changed and improved because of the internet. Due to its supercharged online growth, this is now a term you must know.

What is Peer-to-Peer Lending?

Peer-to-peer lending is an online form of financing that is helping small business owners, students and individuals alike through internet sites. This financing method has different names, all depending on which continent you are on. In other parts of the world, there are off-line versions of peer community lending. Some of the names associated with this form of financing are “Partner”, “Susu”, “Tanda” or even “Rotating Savings Fund”. These types of micro financing programs are occurring in many third world countries.

Today, however, these financing methods are no longer a third world way of accessing capital. Developed countries are now seeing a major shift towards these types of non-traditional financing. The big difference with these funding options in undeveloped countries is that they do not occur online, while peer-to-peer lending is now a big internet phenomenon in developed countries like the U.S., U.K. and Australia.

What is driving this financing explosion? There are many factors affecting financing. This not just at a local, regional or national level; it is now a worldwide issue much like we have seen with financial meltdowns across the globe. Just take a look at the news, read the financial sections, or listen to borrowers talk about their dilemma in accessing capital, whether for personal or business use. With these economic issues across the globe, more individuals are starting their own businesses. This is a significant contributor to an increased interest in peer-to-peer lending, especially when borrowers do not qualify for traditional forms of financing but still feel they have what it takes to start their own businesses.

Another major factor is migration. Migration plays an important role in the widespread use of these micro financing methods. With migration, individuals might not have the necessary credit background to buy a house, car or start a business so they must look outside the traditional ways of accessing capital.

How it Works

In the United States, peer-to-peer lending is creating avenues for many that cannot qualify for traditional bank loans. Students can use this money to pay down their student loans or get started with college. Home owners can use these funds to do much needed repairs around their homes or consolidate their credit card debts, while entrepreneurs can use this funding option to start or expand their businesses.

In order to access a loan through one of these sites, you must have decent credit, that is, a minimum credit score of 620. Just a few short years ago, your credit score could have been 520. This change is due to the number of defaults these lending sites have experienced in the last year or so by low credit score borrowers. To get the fully funded amount, you must present your situation, need and repayment plan in a detailed way that the lenders can identify with very quickly.

These sites have a systematic approach, so you should not get lost in process. Once you have submitted your information to the site of your choice, you will know very quickly whether or not you qualify for funding. Once that has been determined, the lenders can then bid the amount they feel comfortable lending you. These amounts could be as low as US $25 per lender to as high as they feel comfortable with. The highest I have seen to date is $2,000 from one individual lender. In order to get the full amount you need, multiple lenders will fund you. This could be any number of lenders, as long as the amount they commit to tallies to the amount you are seeking. There is a timeline to fund the full amount depending on the site you use. If lenders find your request unacceptable, then you will not get the loan. You must be fully funded at 100% to get the funds in your account.

Getting approved for such a loan can be faster and easier than trying to get a bank loan. For example, if you are a start up business owner and you need a small amount, say $10,000, but you do not have any collateral nor the credit score that fits the banking structure, you can apply to one of these sites. It is possible that you could apply and get the loan. One important part in this process is that you can be funded very quickly. Some borrowers have been funded in as short a period as four days.

A Small Business Solution

Many small business owners find themselves at a crossroad when it comes to financing their business. This segment is a vital part of any business no matter how big or small they are. When the business owner cannot successfully facilitate their financing needs, this can complicate things during survival periods or even future business growth. Through economical hardships or periods of growth, many entrepreneurs often cannot access the capital necessary to keep them afloat. When these entrepreneurs cannot meet payroll, pay their taxes, purchase new equipment, access to capital is a vital part to their staying power. If their cash flow is a problem, these entrepreneurs will not be able to hire employees; furthermore, they might have to lay off staff.

With the banking sector’s tight lending requirements, there has been an increased demand for access to capital for small businesses in the non-traditional market, such as Factoring, Purchase Order Financing, Asset Based Loans, etc. Entrepreneurs must look elsewhere to finance their business when they cannot qualify for traditional bank loans. They must get creative. Peer-to-peer lending is one way to do so. It allows small business owners access to the much-needed cash they must have in order to survive.

Peer-to-Peer Lending Sites

To date, online sites such as Prosper and Lending Club have both surpassed US$250+ million in peer-to-peer financing transactions. That is more than a quarter of a billion dollars each! What makes this financing concept so unique is that the maximum loan amount is US$25,000 for Prosper and US$35,000 for Lending Club. With more than 1.1 million members, Prosper has become a leading source of these microloans. Lending Club has not disclosed its membership numbers at this time. Another site to note is Kiva. Check them out and see what fits your needs.

After checking them out, I would like you to consider the ‘RISK’ involved. Would you lend to you? Is this the right funding option for you? These lenders are ordinary individuals who have chosen to help others. They might be despondent with their banks or other investment sources, and prefer this venue to invest their funds elsewhere. Alternately, you could become a lender. If you have disposable funds that you would like to use in such a process, check them out before you decide to commit yourself and your money.

One important fact to note is that the U.S. government has taken notice. The U.S. Securities and Exchange Commission (SEC) did an investigation of Prosper. This was considered a “quiet period” when they could not lend and no new members could join the site. To date, Prosper has been allowed to continue their operations. I am sure Lending Club had their same share of SEC investigation as they are in the top tier of peer-to-peer lending sites.

If you feel this is for you, check them out. This financing methodology has loaned out over US $500M through two sites in the past five years and is still on the rise. Peer-to-peer lending has grown tremendously, especially in the small business sector in the last 12 months. Do your own research and make a sound decision as to whether peer-to-peer lending is a good fit for you or your business financing needs.