If you could wave a magic wand, it would probably place funds into your cash flow account as it began to dwindle. One never seems to have enough working capital as a small business. We are all familiar with the SBA backed loans and our local banks as lending sources, but they are often time consuming and can take what seems like forever to get approval. A new lending segment of the market known as peer to peer (P2P) is developing as technology advances. Basically, peer to peer lending is a type of loan that takes place between individuals and organizations without any involvement from traditional banks.
Similar to crowdfunding, applications for peer to peer loans are established online. Times have changed since you had to sit down with a loan officer and wait for them to tell you yes or no as they crunched the numbers. Since the market began in 2005, peer to peer lending has skyrocketed. One study shows that since 2006, P2P lending has seen annual growth of about 110 percent, and it doesn’t seem to be slowing down, either. With more and more marketplaces popping up every year, your options have become overwhelming. So who is doing the borrowing in the P2P world? The chart below shows you the approximate age and income of a borrower using a P2P portal.
As a borrower, you have a little bit more leverage with the P2P lending than crowdfunding sites like Kickstarter or GoFundMe. You would normally accept donations from multiple investors in exchange for either equity in your business or some kind of reward or prize. P2P is more like traditional lending, in that you are categorized by risk and rate of return, and will subsequently get a loan for a set interest rate for a set period of time. If you think this is a small market place, think again.
Almost half a billion dollars have been loaned to over a million people since inception. So how can you put P2P lending in action for you? Find a platform like Prosper or the Lending Club where you can list your business and your financial needs, so that potential investors can find you. The upside is that the turn-around time to get money is quick, as little as a few weeks, while the downside is that the amount of money you get from anyone peer is typically small. Thus, the need to make several peer to peer relationships. Investors will look at your financial information as well, so they can make the proper decision for their own financial wellbeing. If your credit is good and you only need a small amount of money, you may be able to get a loan on more favorable terms than you would from a traditional bank, since the online platforms will have less overhead and fixed costs. The following image depicts several of the top sites.
In the next installment of our research on peer to peer lending, we will go into detail on how the process works and the many types of loans available.