In the second part of our topic on accessing the capital markets by small businesses, we will focus on the key elements of peer to peer lending and go into detail how the process works. Again, peer to peer lending is a type of loan that takes place between individuals and organizations without any involvement from traditional banks. You can search for these lending sites, but let us give you a few to look at in particular.
Lending Club: Started in 2007, Lending Club has since grown to become the largest peer to peer lending platform on the web. As a general rule, Lending Club makes personal loans of up to $35,000. Loans are fixed rate and unsecured. Interest rates range from 6.95% to a high of 35.89%, which is determined by your credit grade.
So-Fi (Social Finance): If you’ve seen the commercials you know they are geared towards refinancing student loans. However, they do also provide mortgage and personal loans. If you are a recent college graduate and are looking to pay down debt to start a business, give So-Fi a look.
Prosper: The first peer to peer lending site, Prosper makes personal loans for amounts of between $2,000 and $35,000. Proceeds of the loan can be used for just about any purpose, including debt consolidation, home improvement, business purposes, auto loans, and short-term and bridge loans.
Funding Circle: This a peer to peer lending site for people who are looking for a business loan. The platform has made more than $2 billion in loans to more than 12,000 small businesses around the world. Money can be used to refinance existing debt, buy inventory or equipment, to move or to expand your operating space, or even to hire additional employees.
Investing through peer to peer sites makes good sense for investors, as they receive a higher rate of return and typically funds are lent for shorter durations. There are even more reasons why a borrower would want to get a loan.
- Lower Interest rates
- Bad credit is less of a problem
- Ease of Application process
- No face-to-face
So how does a business begin the process of obtaining a loan? Each platform will have its idiosyncrasies, but the overall application process is similar and straight-forward.
- Brief questionnaire: The platform does a “soft credit pull”, and you’re assigned a loan grade.
- Loan grade: Investors will review the loan request and determine if they want to invest at the assigned loan rate.
- Investor Interest: When enough investor interest is shown in your loan, your loan will then be eligible to be funded.
- Documentation: Providing proof of income and employment, and a list of existing debts that you intend to repay with the new loan if appropriate.
- Application Review: The loan is then underwritten to make sure that the documentation supports your claims in the initial questionnaire.
- Funding Approval: The loan documents will be prepared, and sent to you for signature. Funds are typically wired to your bank account within 24 to 48 hours of the receipt of your signed documents by the peer to peer platform.
Not too shabby. Take a look at peer to peer lending if the situation arises for your small business.