So here you are – you’ve poured as much of your own money as possible into launching your business, but you’ve just been rejected for a small bank loan – after several months of waiting – and your SBA loan application doesn’t look too promising.
Now before you blow a gasket thinking about it, I’ve got good news and good news.
That last bit wasn’t a typo.
The first bit of good news is you’re not alone. Secondly, you have another alternative – and no, I’m not talking about crowdsourcing your launch, which Jeff Fabian covers in detail in this guest post.
Because let’s be honest – not all strangers are willing to just give you their already-scarce money.
But they might be willing to loan some to you.
Ever Heard of Peer-to-Peer (P2P) Lending?
Here’s peer-to-peer lending, also known as social lending, in a nutshell: investors lend funds directly to borrowers, cutting out the banks altogether. As Ross Kenneth Urken of AOL Daily Finance puts it:
“Think of it like a social network for loans.”
P2P lending has two primary uses:
- startup loans
- personal loans to pay off credit card debt
Feeling a little skeptical? Here’s what’s in it for you.
Entrepreneurs’ Benefits
For starters, its interest rate is much lower compared to bank loans, which currently average 8-9% interest, according to Chief Technology Investment Strategist Alex Daley of Casey Research.
If you were eyeing credit cards as a temporary funding option, back off. Daley reported that as of late November 2011, credit card loans bludgeon you with an average interest rate of 12.78%.
The P2P lending interest rate can be as low as 6%, and that includes all payment and processing fees.
That rate may sound dubious, but P2P lending sites can offer it because they’re virtual businesses, (no brick-and-mortar headaches), and much of their processes are automated, which means fewer employees.
Another perk for you: since you’re not dealing with gun-shy banks red-taping you to death, but with investors who actually feel your pain, you receive the funding you need in less time.
Investors’ Benefits
Lenders get a sweeter return from P2P lending than with most other “safe” investments – 10.46% on average, according to Urken.
P2P lending sites also allow lenders to more evenly distribute their money. They can pay as little as $25 toward any loan, and do that across hundreds of loans, diversifying their portfolio.
Here’s how it works.
- You create an account and complete a loan application.
- You submit your credit and banking information (all transactions are EFT).
- You name your listing and explain the purpose of the loan you’re asking for.
- The P2P lending site reviews all your information, assigns its own personal score to you based on your FICO score (A, B, C, etc. in order of increasing risk), and assigns the loan’s interest rate based on its proprietary score.
- The site posts your listing for investors to find.
- Investors contribute to your listing until you’re fully funded.
- If for any reason your listing wasn’t fully funded on its first run, the site reposts it to attract more investors.
- Once your listing is fully funded, the site automatically sends payments to the bank account you provided.
- You begin making payments back to the investors through your account on the site, which draws the money from your bank account and pays it back to the investors.
Now that you’re interested, here are 4 peer-to-peer lending sites to get you started.
The 2 leaders:
- LendingClub – the frontrunner of the industry so far, funding over $36 million in loans per month as of March 2012
- Prosper – the competitor, funding over $320 million in loans to date
2 newer options:
- LendFriend
- Loanio (website under construction)
However, as you do your homework, I’m sure you’ll see that this P2P lending stuff isn’t all roses.
P2P Lending’s 3 Biggest Caveats
Unfortunately, peer-to-peer lending isn’t available in all states, so be sure to do some research before you dive in to ensure you’ll get the loan.
P2P lending expert Peter Renton’s Social Lending Network blog lists the states that currently prohibit social lending, including:
- Indiana
- Idaho
- Iowa
- Maine
- Mississippi
- Nebraska
- North Dakota
- Ohio
- Tennessee
- Texas
- Vermont
Also, make sure your credit report’s square before you go this route, because as you saw above, P2P lending sites link and display your credit information to potential investors to help them assess the financial risk of lending to you; plus your FICO score determines how much you can borrow.
According to Renton, it’s best to have a FICO score of 660 or higher with a debt-to-income ratio of 25% or less to ensure you receive funding.
Thirdly, keep your loan term as short as humanly possible, because the longer the term of your loan, the higher your interest rate will be.
Keep these things in mind, and you’ll get the funding you need.
Despite the current rough economy, you chose to step out and start your own business, but raising funds is one of the biggest pains of launching and sustaining it. Peer-to-peer lending may be the solution you’ve been looking for because it saves time and reduces your interest burden by about 2%.
And if you’ve tried all the other options to no avail, then it’s the only option you have left.
Any way you view it, it’s worth a shot.
For more information about peer-to-peer lending, follow these links.
Alex Daley’s article: Earn a 10% Yield Without Buying a Single Stock, Thanks to Technology
Melanie Brooks’ P2P lending overview article for FreelanceSwitch: Have Your Heard of Peer-to-Peer Lending?
Peter Renton’s blog: Social Lending Network: Your Peer-to-Peer Lending Guide
Ross Kenneth Urken’s AOL Daily Finance article: Either a Borrower or a Lender Be: Why P2P Lending Keeps Growing
Bio: Mellissa Thomas gives businesses the content they need, specializing in entertainment, entrepreneurship, and Christian industries; and blogs about the entertainment business and entrepreneurship. You can follow her on Twitter @mellissathomas.
Course Recommendation: Raising Money for Startups. Learn more now.
