Peer to peer lending, for small business finance

A new type of financing has recently emerged, in the business finance arena. This type of financing is called peer to peer lending. Peer to peer lending, (also called person to person lending), is useful for small businesses, as a source of business loans and business credit. As business credit has significantly tightened in the banking sector, small businesses have had to look toward other sources for business loans. Peer to peer financing is one valuable source of financing that has been tapped, by many small businesses.

Peer to peer lending is simple. It is lending between two individuals. Many businesses choose to go to peer to peer lending sites, for simple reasons. Some of these reasons are:

• Businesses can get cheaper and easier loans, through peer to peer lending sites than through banks. This is particularly true with the tight lending conditions which companies are currently experiencing at banks.


• When businesses or entrepreneurs can't get loans from traditional lending institutions, in the current environment, they are forced to use lending sources like peer to peer lending or merchant cash advances.


• There are far less requirements and conditions on this type of loan, when compared to traditional lenders.

It is important to keep in mind that many of the peer to peer lending sites don't make loans to businesses. However, there is a way around this if a business is a start-up, or if an entrepreneur is trying to get a loan to pursue an idea. They can usually borrow as an individual. You should understand that when the loan shows up on your individual credit report and, because it is a debt, it may lower your credit score. Peer to peer loans are considered personal debt, even when used for business purposes.

Peer to peer lending works much like an online auction transaction. Using one of the peer to peer sites, you set up an account. It is important to take the time to research several different sites, before you commit to one. Be sure to look for recommendations, read reviews and then choose the site that you feel the most comfortable with. In addition, you should be sure to read their guidelines, and understand the types of loans their lenders fund. Then, you post the amount of the loan you need, and the maximum interest rate, you will pay on their online auction site. Keep in mind that you will have to have a good personal credit score to qualify for a loan, usually 640 or more.
Your loan request then goes into a 7-day auction. Lenders will bid on your loan and, as they do, your interest rate may go down. If you are nervous, remember that you can change your mind, and stop the auction.

You should also understand that the interest rate and monthly payments are fixed, and there is a one-time closing fee. There is usually no charge for prepayment, and the loan is unsecured, which means no collateral in involved. The term is usually about 3 years. The monthly payments are most often automatically deducted from your bank account.

Peer to peer lending, for businesses is usually cheaper than borrowing from a bank, because the middleman (the bank) is cut out. Remember that banks have overhead they have to pay (buildings, administrative costs, employees etc). In today's market, banks are also struggling to regain losses they took in the credit crisis, which may increase their interest rates. Using peer to peer lending can allow you to get the absolute best interest rate, because lenders are competing for your loan. In addition, since most peer to peer loans are fixed rate loans, they can be amortized.