Looking for a business loan? Peer-to-peer (P2P) loan websites may be a better option than a bank (even if the acronym doesn’t exactly roll off the tongue). And it’s an especially attractive option for SMBs that wouldn’t otherwise qualify for a traditional bank loan.
As New York Times writer Amy Cortese recounts, P2P started in 2007 during the subprime mortgage crisis as an easier and lower-cost financing alternative that bypassed traditional lenders, which had lost considerable consumer confidence. Instead of institutions lending money, individuals lent money to each other over websites such as Prosper Marketplace and The Lending Club.
On these sites, people and businesses provided a profile why they need a loan and interested individual investors offer financing. Borrowers typically got lower financing than they would have from banks, and investors earned a potentially higher return than leaving their money in a certificate of deposit.
P2P Lending Favors the SMBs
As American Banker reports, small business owners are increasingly turning to P2P both because the application process is less onerous than banks’ processes and because loan rates are more favorable. This is due, in part, to the fact that P2P lending sites have less overhead; at least one third less than the average retail bank.
These days, though, P2P isn’t quite the same match of peers. In fact, many lenders are venture capitalists, not “average joes” with spare cash. Venture capitalists in particular like P2P because it allows them to finance a business proposition without the risk of taking an equity stake. Even the very institution P2P was designed to circumvent—banks—are getting into the game; The Lending Club filed an IPO with Morgan Stanley and Golden Sachs as underwriters.
The Future of Financing
This isn’t to say that P2P is so tarnished now that it seems to have gone mainstream. The Wall Street Journal reports that cutting out the usual middlemen of credit cards and banks is the future of financing, which is why more hedge funds, venture capitalists and other institutional financiers are getting into P2P.
This is good news for SMBs. For example, The Lending Club now offers business loans up to $300,000 at fixed rates starting at 5.9 percent, with no prepayment penalties or hidden fees. There are no appraisals or business plan submissions. No collateral is required for loans under $100,000. And as with all P2P transactions, lending is regulated by the Securities Exchange Commission and other regulatory agencies.
Making Loans Most Banks Won’t
The advantage to SMBs, as Business Week points out, is that P2P brings down the overall cost of borrowing, particularly for those who wouldn’t qualify for traditional bank loans. The presence of institutional investors makes that prospect even more sustainable. This means more capital for borrowers and greater scale for the P2P platform, which continues to make smaller loans than most banks are interested in providing.