While the worst of the global financial crisis is now three years behind us, one area of the economy that has yet to fully recover is the small-business loan market. Because large banks are still dealing with the economic fallout, and trying to reduce the size of their loan portfolios, most of them are only interested in lending money to their biggest, most creditworthy clients. So where is an entrepreneur to go when in need of a loan for his business? One answer may be to look to the world of peer-to-peer (P2P) lending.
The premise and business model of P2P is fairly simple: People lend money to one another and to small businesses via the Internet. Both sides benefit by cutting out the costly middleman—the bank—and borrowers wind up with more affordable loans while lenders get a higher rate of return than they would from parking their money in a savings or money-market account.
P2P lending got its start in the early 2000s and grew significantly during the financial crisis as bank lending all but stopped when the global economy seized up. And it just got a big boost of legitimacy when John Mack, the former Chairman of Morgan Stanley, one of the world’s largest investment banks, joined the board of the P2P firm, Lending Club.
If you are interested in obtaining a P2P loan, it’s easy to get started. You’ll need to fill out an application at one or more P2P lending firms where you’ll be asked to divulge some basic information about yourself and your finances, agree to provide access to your credit report, and write a personalized listing describing the purpose of the loan and why lenders should feel comfortable loaning you money.
If the P2P company approves you as a loan candidate, they will assign you a credit rating based on your credit history and financial situation. The more creditworthy you are deemed, the higher your rating will be and the lower the interest rate you’ll wind up paying. The P2P firm then places the details of your loan request on its online platform where lenders look for investment opportunities that fit their risk and return profiles. There is no guarantee that your loan will get funded, but if it does you’ll receive the money in a timely fashion and be required to pay it back in fixed monthly installments.
One of the keys to passing muster with any lender, be it a bank or a P2P firm, is to maintain an outstanding credit score so be sure to do everything possible to boost your score before applying for a loan.
And whether or not you’ve had trouble obtaining bank loans for your business it may be worthwhile to look into the possibility of obtaining P2P financing. While the traditional banking industry has been shrinking since 2008, P2P lending has been growing, meaning that both borrowers and lenders see it as a valuable platform to help meet their financing and investing needs.