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Why Aren’t Banks Lending?
Sometimes securing a business loan can be a difficult proposition. Banks are often hesitant to lend money to startup businesses or ones with poor credit. If your business finds itself in this situation, don’t fear: there are other options.
A fairly new borrowing option for individuals and businesses is peer-to-peer lending, also known as crowdsourcing, person-to-person lending, social lending or p2p lending. Simply stated, peer-to-peer allows a person or company to borrow money without a banking intermediary.
“This is a great opportunity for an individual or business to get financing for non-traditional loans,” says Brock Blake, CEO of Lendio. “We send a tremendous amount of businesses to use p2p loans—businesses that can’t get approved for traditional loans.”
People seeking peer-to-peer loans sign up on either Lending Club or Prosper as a borrower. The borrower submits an application for the loan, and, if approved, the loan is placed on the website for prospective investors. Peter Renton, publisher of Social Lending Network, says investors typically invest a small portion of many different loans, which helps spread their risk.
The borrower’s loan will stay on the website for a short time—usually up to two weeks. While the loan is on the site, investors are able to ask the borrower questions to help them decide whether to invest in the loan. The borrower’s credit report is provided to investors but no personal information is available.
“As a borrower, you can get hundreds of individuals to loan you a little bit,” Blake says.
During the time the loan request is posted, says Renton, one of four things usually occurs: a borrower cancels the loan and pulls it from the website, the loan is pulled because it fails some part of the verification process, the loan is fully funded, or the loan fails to obtain funding after 14 days.
Peer-to-peer lending is often a great tool for investors as well, particularly since the process can be much simpler than traditional investments.
“From an investor perspective, peer-to-peer lending allows you to directly invest in other people, thereby completely bypassing the banking system,” Renton says. “Investors simply sign up at Lending Club or Prosper, link to their bank account and then transfer money in.”
Lending Club, for example, offers three investment options: low-, medium- and high-risk loans. Investors can use a tool to choose an average interest rate and select how much money they wish to loan. Investors can also choose loans individually.
The maximum loan amount one can borrow is between $25,000 at Prosper and $35,000 and Lending Club. Renton says small businesses looking to expand are among those that most often seek these types of loans.
And unlike bank loans, one can know quickly—within hours—whether the loan has been approved. For startup businesses in particular, peer-to-peer lending is a viable alternative to bank loans. “They’re pretty efficient,” says Blake. “It’s a good option if you’re not looking to borrow a lot or if you have low or not ideal credit. Sometimes it’s your only option, and one option is better than none.”
Blake says the better credit score a person or company has, the better the interest rate will be. The terms are typically one year to three years, and Renton says the rates are better than those you’d find with a credit card.
Peer-to-peer loans can also be in addition to traditional bank loans, meaning if a business can’t get approved for all the money it needs or wants from a bank, the remaining can be made up from the peer-to-peer loans.
Not all companies should seek this lending method. “For companies seeking to raise substantial capital, p2p is not for them,” Renton says. “Also, even though the loan may be used for business purposes, it is still a personal loan so if a business owner has poor personal credit, they would not be a good fit.”
Renton also points out that since peer-to-peer loans are personal in nature, the interest isn’t tax deductible. Further, he says although you may be approved for a loan on the platform at Lending Club or Prosper, you may not get enough investor interest to fund your loan, particularly if your credit is on the lower side. The rates are higher than bank loans but do have a cap.
Still, Blake says peer-to-peer lending is easy to pay back, with automatic payments available. And though they’ve only been in existence for about five years, Blake says they’re growing in popularity and he recommends the method to those businesses that fit the criteria.
“They’re gaining a lot more traction in the marketplace,” he says. “A lot of people are using it. The more resources someone has, the better.”