To have an industry that started less than a decade ago and is valued at more than $60 billion shows the obvious demand and popularity of peer to peer lending for businesses. The peer to peer business lending industry is on the verge of overtaking traditional lending as more and more investors are chasing very high returns available in this funding model. To put it into perspective, peer-to-peer lending is a recent development that brings the use of the internet to connect individual investors seeking to lend money to others such as small businesses seeking to borrow money.
An overview on this shows that potential borrowers can apply for credit on peer-to-peer business lending websites. Investors are then given the opportunity to choose to fund part or the whole loan and are repaid periodically with interest on their investments. Having grown rapidly over the last few years, this industry brings numerous benefits and few disadvantages to small businesses seeking financing.
A Brief Background
Peer to peer lending is a unique option for raising funding which is made possible by the internet. These platforms do not in real sense lend money; instead, they build up internet platforms that connect potential borrowers with willing investors. In simpler terms, it can be said to be a hybrid of crowdfunding where there is a pool of small amounts from many investors willing to give money to potential borrowers only to be repaid with returns. Just a few months ago, online loans funded by retail investors were only available to individual borrowers as consumer loans. This has, however, rapidly changed as small businesses can now access these types of loans to finance their businesses.
Peer to Peer Lending and its Implications for Small Businesses
Peer to peer business lending offers several potential benefits and certain notable drawbacks. On the benefits side, peer to peer lending can provide credit to small business owners who are in the market for loans and are not able to secure them from traditional lending institutions such as banks. This becomes beneficial, particularly when the business has been denied a loan by a bank, or when there is a need for urgent funding.
On a negative side, peer to peer lending can be so expensive to small businesses as they tend to charge higher interest rates than traditional loans from banks. On the same note, these peer to peer loans are unsecured, making lenders bear all the risks especially if the small business cannot repay back the loan.
Peer to peer business loans are also typically fixed-rate loans and are often short-term and available in smaller amounts compared to those that are offered by traditional banks. Nevertheless, they are crucial to small businesses in the sense that they may fill the gap for entrepreneurs who are looking for small amounts of loans, especially when there are no other options or when existing lending options are not suitable.
On a positive note, peer to peer lending can be beneficial to small business owners because there is the existence of anonymity between borrowers and lenders. Remember, though, that personal information is encouraged, as they may persuade lenders or investors to fund a particular project. It is also important to keep in mind that some peer to peer business lenders may report to credit bureaus thereby can enable small businesses to build and improve their credit history, which may be of great importance in the future.
There is a positive growth trend in peer to peer lending to small businesses. In 2013 alone, the top five peer to peer lending platforms in America offered more than $3.5 billion in loans to both small businesses and consumers. This was noted as a three-fold increase over the previous year. If this statistic is anything to go by, there is no doubt that peer to peer business lending is the wave right now and small business owners cannot afford to ignore these amazing platforms in their quest to acquire finances for building their business empires.