Is Peer-to-Peer Financing Right For Your Business?

Last month, we talked about some new avenues in lending opening up to potentially help with cash flow for your small business, so you can finance equipment, training and more. From Kabbage and Fundbox to PayPal and Square, these online lenders are getting more credibility as a legitimate alternative to traditional banks than they have in past years.

Now let’s take a look at another category of online lending that might be a good fit for your business – peer-to-peer financing. 

How does it work?
Peer-to-peer lending (P2P) is different from a traditional bank in that you’re not borrowing from a brick-and-mortar financial institution. You’re borrowing from a composite of a variety of lenders in an online auction marketplace. Each lender represents a very small piece of the overall loan.

Once you set up an account and read about the types of loans available, you post the amount of the loan you need. You’re also able to select the maximum interest rate you will pay when someone bids for your loan. The bidding process then begins and with the more competition bidding for your loan, the more likely you’ll receive a favorable interest rate.

The actual peer-2-peer service handles a great deal of the actual transaction between you and the lending individuals, including monthly deductions from your bank account, verifying identities, communicating with credit bureaus and more.

A couple of the most popular resources for peer-to-peer lending are Lending Club and Prosper. Both of these tout a very easy application process in which you can receive multiple quotes in minutes. No matter what your interest rate ultimately is, it is done on a fixed basis year to year.

As an industry, P2P lending is absolutely exploding. In just the last 5 years, it has grown more than 65 times over. And based on what analysts are predicting, that’s just the beginning with up to 10% of traditional banking customers moving over to either P2P or another type of alternative in the next 5 years. That’s about $11 billion dollars worth of change.

“If I could actually get a loan from a traditional bank, should I forget going through a P2P lender or another type of online lender?”

Well, not so fast. You may want to still keep your options open until you fully investigate all possibilities. Consider this – traditional banks can have a lot of overhead, including the building itself they’re in and all the associated costs with it. A P2P or other online service cuts out this “middleman” and the possibilities of such overhead costs being passed along to you.

So do check out what the traditional bank is offering but keep the whole picture in mind, including your interest rates from institution to institution. With more potential options for getting the financing you need for your business, the more you could find yourself in the driver’s seat. And isn’t that really where you deserve to be in the first place?