How to Make Peer-to-Peer Borrowing Successful

At some point, your business will need some cash. Whether you need startup funds or had a rough quarter in sales, sometimes your bank account cannot take the hit. One option to get help is to turn to a friend. Many people hesitate to ask friends because they do not want to ruin the relationship, however, there are ways to make the process a smooth one.

Figure out who to ask

You will need to find someone with the financial means to help you out. Do a mental survey of your friends and family and see who might be willing to help you out with some money.

Make it easy for the lender to say no

You do not want to damage your relationship so make sure you are asking someone who feels comfortable saying no to you. Make it clear that there will not be any hard feelings.

Be honest

Honesty is the best policy if your peer is willing to lend you money. It could take some time to pay back this loan so be honest about your progress until everything is paid off. Also, be willing to share your financials and business plan with your potential lender too.

Ask for what you need

Your loan is riskier to the lender if you ask for too little. To make this a successful transaction borrow enough money to solve your problem, otherwise it is not worth it.

Make a plan to pay it back

Come up with clear terms to pay back the loan. Whether you plan to pay it back in installments or in one or two lump sums, there should be a plan in place. Try coming up with “best-case” and “worst-case” scenarios with plans for each. Set deadlines to make it fair for you to and your lender, and to make yourself accountable.

Find out what your lender wants in return

Some might not want anything except to be paid in full, some might want interest, or a stake in your business. Make sure that you discuss what is in it for your lender before you take any money. If you are borrowing money for over a year you might want to consider offering to pay interest.

Get it on paper

If you want to have a lawyer write up legal papers, go ahead. Type up a letter that explains the loan the terms. This informal write-up services as a reminder of terms than anything else. Discuss what is best for your situation with your friend or family member.

Do not forget to say thank you

Say thank you and appreciate the gesture. Once the loan is pad off, consider doing something nice for your lender.

Advantages of Investing in P2P Lending

  • Help support small businesses or individuals by lending money
  • Start investing with a small dollar amount
  • Customize loans (amount of loan, risk level, term, etc.)
  • Diversify loan portfolio by spreading money into multiple loans
  • Achieve higher yield than currently available (through savings accounts, CDs, etc.)
  • Automate your account so that you don’t have to review individual loan requests

Disadvantages of Investing in P2P Lending

  • Risk losing money (potentially all your principal) if borrowers default on loans
  • Principal investment is tied up for the full term of the loan (typically 2 to 5 years)
  • P2P lending has not been long-term tested in the marketplace (has gained popularity within the last 10 years)
  • Investment is not FDIC insured
  • Qualifications/restrictions vary by lending platform and permanent residence of investor (some platforms do not operate in all states)

The Bottom Line

Many investors are drawn to P2P lending because of the promise of high returns, but few investors take the extra time to discover how they can maximize these returns. If you implement these five keys it is highly likely that you will become a successful P2P investor with above average returns.