What You Need to Know About Peer-to-Peer Loans

There’s a new source of small business financing in town. It’s called peer-to-peer loans, sometimes called person-to-person lending, peer-to-peer lending, or P2P lending. Whichever name you choose to use, it’s a new breed of financing whereby individuals, or groups of individuals, make loans to other entrepreneurs  throughout the United States. In a nutshell, individuals use a peer-to-peer lending platform to make “microloans” to finance entrepreneurial venture. Entrepreneurs and small businesses across the U.S. and globe are using peer-to-peer loans to grow and prosper.

Here’s what you need to know about peer-to-peer loans:

Ease and Simplicity

Want to avoid lengthy processing times, exorbitant fees, and stringent requirements?  In most cases, peer-to-peer loan applicants are approved or denied instantly. Loan processing generally takes under two weeks, which is a far cry from the seemingly endless paperwork and lengthy processing time of bank loans.

Lower Interest Rates

Typically, annual percentage rates (APRs) on peer-to-peers loans can be several percentage points lower than banks. However, like researching any loan, shop around for the best interest rates.

Availability of Platforms

Speaking of shopping around, there are a number of peer-to-peer lending sites to choose from, and more emerging all the time. Some of the more popular platforms include Prosper, Lending Club, Zopa, and Kiva.

Credit History Implications

In most cases, peer-to-peer loans are extended to an individual rather than a small business. This means the peer-to-peer loan impacts your personal credit history and credit score. It also impacts the credit history of your small business, since the financing isn’t tied to the small business.

Absence of Federal Lending Laws

Another important thing you need to know about peer-to-peer loans is that the lender isn’t required to operate under federal lending laws. Since peer-to-peer loans represent private lending transactions, they don’t have to conform to lending laws.

Absence of Collateral

The fact that peer-to-peer loans are unsecured means no collateral is needed, which eliminates the expense and paperwork involved in the placement and valuation of liens on collateral.

Qualifying is Easier

This can actually be a blessing or a curse. First the good: If you’ve been disqualified for a bank loan, getting money from a peer-to-peer lender can help you start up or sustain your business. It can also be a downfall if you take on too much debt that you can’t handle. Take a good look at your financial situation, preferably with your accountant, to examine your risks of not being able to pay back the loan.

As the credit markets tightened and interest rates dropped, peer-to-peer lending has opened the doors for funding for many small-business owners who couldn’t get lending otherwise. There are advantages and disadvantages to peer-to-peer loans for both the lender and borrower, and both need to be examined closely to ensure it’s in the best interests of the individual and business.