Peer-to-peer (P2P) lending has been gaining popularity as an alternate source of financing for individuals. Peer-to-peer lending can be used to finance small businesses and startups too. In this article we will outline the basics of peer-to-peer lending and its advantages and disadvantages.
Peer-to-peer lending is a type of financing by which an individual can get a loan from other individuals through a P2P platform. Peer-to-peer facilitators work with people who need money and investors who lend money. They facilitate the process of getting both of the parties together. Individual investors do not lend the full amount of the loan. Instead, most investors invest small sums of money on a number of loans in order to mitigate their risk.
The limit to the loans is often times about $35,000 but it varies by site. Once you submit an application, the site lists your loan request. This allows investors to start placing funds. Listings have a deadline and if the loan request is not funded by that deadline, you have the option to take partial funding or decline the loan.
Most peer-to-peer lending solutions do not lend money to businesses. Instead, they lend money to the individual, who then uses the money for their businesses. Some of the information the individual needs to provide are about themselves, their finances, and the intended use of the money. Most P2P companies request your credit information for credit-scoring purposes.
The most important advantage of P2P lending is that it can provide financing to entrepreneurs who need less than $35,000 of funding. P2P lending offers a viable alternative for entrepreneurs who cannot qualify for bank financing. Note that most lending institutions do not work with companies that need small business loans because these loans are not very profitable.
Another advantage is that many P2P loans have affordable interest rates, especially when compared to alternatives. An important benefit is that most P2P loans are unsecured and do not tie up any collateral directly, so it is important for small business owners who need financial in the future.
It is important that you keep in mind that peer-to-peer lending companies often use your credit score to make decisions. P2P lending might not be good for you if you have poor credit.
Most loans get funded within 7 to 14 days according to most P2P companies. This is faster than those of banks and sounds quite good. However, there is a chance you will not get fully funded. It is up to investors to decide.
P2P lending may help you set up a small business, but it might not be much help if your business grows. The limit is $35,000 so if you grow and need more, then you are better off with another option.
This loan also has a closing fee. The average is 5% of the loan at the time of this writing. It can be a steep cost. The fee is usually deducted from the loan itself so be sure to adjust your loan request to account for the cost.
There are other options to consider for financing: