What is an entrepreneur to do in order to find money? No matter what business you have created or what you are selling, it will require capital. Establishing your LLC or S or C corporation is just a start. Once the business is actually open, it is necessary to find money. A bank loan may not be an option.
The Trouble with Banks
Bank loans for startups are hard to obtain because traditional banks find them risky. Your bank takes Peter’s money on deposit and lends it to Paul, so they have an obligation to Peter to keep the money safe. Since the Federal Deposit Insurance Corporation (FDIC) insures bank deposits, that adds layers of risk management requirement. The U.S. Federal Reserve regulates how much money is in the banking system, so your capital needs are subject to their regulation also. There are other regulators too, but in short, regulators provide a major reason for the conservatism of the banks.
So, are there alternatives? Are there other ways to obtain capital for your new business? The good news is that there is.
What is Peer to Peer
Peer to peer lending is growing as an attractive option for borrowers and investors alike. In essence, peer to peer (commonly abbreviated as P2P) is the practice of lending money to “peers” or unrelated individuals without going through a traditional financial intermediary such as a bank or other financial institution. Traditional financial institutions fall under three categories: deposit takers, insurers, and investors. P2P does not fit neatly into any of these.
The lending takes place online via P2P company websites using various platforms and credit checking tools. There is no prior relationship necessary between lenders and borrowers. Transactions occur on-line. The loans are unsecured and not protected by government insurance (and therefore, no FDIC regulation).
P2P loans are generally personal in nature. In addition to credit scores, and histories, potential borrowers can submit community affiliations, statements from friends and associates, and personal loan descriptions. Since you are not using a large bank with large overhead costs, the interest rates may be lower than you might pay otherwise.
And Lower Rates – Probably
As this type of loan is normally personal, P2P lending could be used for debt consolidation such as credit cards. Chances are that the rate will be considerably lower than the existing rates on the cards.
To get such a loan, simply go to a P2P website and apply. Prosper is a leading P2P online lending intermediary. Current rates can be found on the same page as the application. You have an option to borrow money through Prosper or lend money through Prosper. Either way, the rates are competitive without the bank acting as a middleman. To borrow, you are able to submit other information besides your credit history. To lend, you are able to consider whatever criteria you wish.
Loans may be arranged through Prosper for a variety of personal reasons, including home improvement, debt consolidation, or weddings or baby adoptions. Real estate loans do not qualify.
As many small business owners max out their personal credit cards while building a business, a P2P loan may offer a good way to pay down those balances, exchanging high rates for much lower ones.
Peer to peer lending may offer an attractive option for debt consolidation and other personal credit needs.