Peer-To-Peer Loans - For Business Financing

Need just a small amount of capital ($25,000 or under) to kick start your business but can't get a lender to take your call? You might think about turning to the social network.

Peer-to-Peer Loans:

Peer-to-peer loans (also called social loans) are essentially personal loans that one could use for nearly any purpose - even business purposes. These loans are unsecured, have some of the lowest interest rates in the market, and, best of all, don't come from any bank or private lending organization; thus don't come with all the hassles that those types of loan are known for.

These fixed rate, unsecured term loans typically have interest rates starting at or just under 7% with average rates ranging between 9% to 10%. Much lower than traditional unsecured loan rates that range from (on average) 12% to 15%. Further, with terms up to 60 months (average around 36 months), these loans can be easier to get approved and provide to be much more affordable for the borrower.

These personal loans are facilitated by individuals who have small amounts of disposable capital; who then come together to lend that money in aggregate to borrowers who may not qualify for bank or other financial institution loans.

Peer-to-peer loans or social loans essentially takes out the middleman (the bank) and lends money directly to borrowers.

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How It Works:

You find one of the many online peer-to-peer websites. Sign up for an account. Then, make your loan request. Usually no fee to join the site or make a loan request.

When making your loan request, you get the option to tell your story - to tell potential lenders - people just like you who have small amounts of disposal income and who are willing to lend that money out - your complete story. Why you need those funds, what you are going to do with them and the results you expect to achieve.

Once your request is made, the website's platforms will usually pull your personal credit history and score your entire deal - some sites will even set an interest rate at that point while others will allow the potential lenders to bid on your overall interest rate (allowing you to accept the lowest interest bids).

The site will then post your loan request on their site - allowing lenders (other members on the site with money to lend) to view your deal.

If enough lenders come together to fund your loan, the site will pool those funds, close the deal (get you to sign off on the loan and its terms) then send you the cash.

Further, the website's platform will monitor the loan, collect your monthly payments (might even pull it directly from your bank account) and distribute those funds to the individual lenders.

In the end, you get the capital you need and small, individual lenders receive a little more return on their capital then they would had they left those funds in an account with their financial institution.

Example: You need $10,000 to kick off a new marketing campaign for your business to promote a new product line launch. Your bank and other lenders tell you that you have not been in business long enough for them to lend to you or your business.

Your approach a peer-to-peer lending site, sign up and make your loan request. The site scores your deal well and posts it with an 8% interest rate for 36 months (3 years). Within a few days, 100 individual lenders agree to fund your request at an average investment of $100 each.

You receive the funds, less the website's fees and make monthly payments of $314 per month; of which the site breaks down and distributes to each 100 individual lenders.

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The Lenders:

The lenders are people just like you and me. They join these peer-to-peer websites as investors looking to find solid deals to invest in (lend money to). These individuals have small amounts of disposable income that they want to put to work. Thus, instead of placing their capital in an interest bearing bank account and earning less than 1% of those funds, they can invest (lend) those funds to people like you and earn 3, 4, 5 times or more on that money - all the while providing you the capital you need and might be able to get anywhere else.

The best part for these lenders is that they get to actually hear and decide on your complete story. Most traditional lenders don't really care about your needs and future goals - they only need to make sure that your potential deal will fit within one of their lending boxes.

However, with peer-to-peer lending, you get the chance to tell your complete story - to sell your deal to these potential lenders. You have a better chance of getting the money you need and lenders receive more information and feel much better about approving (and funding) these loans.

Bottom Line: Dealing with individuals just like you and not loan officers who are limited in their decisions by set loan policies - means a better chance for you to receive the funds you need.

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Benefits:

• These are unsecured loans and thus do not require any collateral and all the expense and hassle of valuing and placing liens on that collateral.
• Peer-to-peer lending reduces the cost and complexity of lending and that savings is pass on to you,
• Terms of up to 60 months (five years) making for more affordable payments,
• Apply in minutes and get an instant rate quote,
• Funds can also be used to consolidate debt - both secured debt and credit card debt,
• Loan payments can be automatically withdrawn from an account you specify (saving you the time to write another check each month) - Does anyone really write checks anymore?,
• Fixed rates also means fixed payments - fixed for the life of the loan - no variable rates and climbing payments,
• Faster and Easier Processing - you can receive a decision and funding in a matter of days - your request does not have to go in front of a supervisor or to a credit committee which could take weeks or more,
• Less documentation than traditional loans as well as less continued reporting and oversight by the lender - saving the borrower both time and money.

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Why Peer-to-Peer Lending?

When banks and other types of lending institutions were first developed, they were born out of a need for a financial intermediately to pool small amounts of capital from individuals (depositors), package those funds up and lend those monies out to other individuals who are in need - all for a return on that loan to be shared by all who participated.

The need arose when persons needing more capital then they had - found it extremely hard to go to neighbor after neighbor negotiating separate loans with each one of them for a small portion of what the borrow needed. Then, having to spend an inordinate amount of time servicing each and every one of those loans.

Banks and credit unions were set up to fill this gap - they would pool individual's spare cash (depositors money), bundle those funds up and lend that money out - all at a price (interest) that was shared with each depositor.

However, over time, banks found that they could get money from other sources - like investors or from the government (instead of from depositors) and by doing so, could keep more of the interest they were earning on the loans they made.

Today's financial institutions have taken it even further, instead of using depositors funds, they are taking investor money or money borrowed from the government (at really low rates) and instead of loaning those funds to individuals and businesses, they are lending it to the government in the form of treasury purchases.

Again, creating another funding gap for persons in need of a large amount of capital.

To partially fill this gap, peer-to-peer lending sites allow individuals to come together on a simple platform and essentially by-pass traditional lending institutions - for small (usually under $25,000) amounts of capital.

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Costs:

While peer-to-peer lending does take out the middle man for the most part, the actual lending sites that facilitate these transactions do incur costs (cost of developing, providing and managing the platforms) as well as expenses in managing the loans (pulling credit, collecting payments, distributing principal and interest) and thus, charge a fee for these services.

Most of these peer-to-peer lending websites charge the following:

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