Peer-to-peer business lending is slowly but surely overtaking traditional lending as the best option for small businesses. This is because more and more investors are looking to cash in on the very high returns available in this type of funding model. Peer to peer lending is a very recent development that utilises the convenience of the Internet to bring together investors and small business owners looking to borrow money. This type of lending option is a unique way to raise funds for your small business over the Internet. This platform does not directly offer you money, but instead, puts you in contact with potential and interested investors. In even simpler terms, peer to peer lending is a type of crowd funding, where many investors pool together small amounts to borrow to lenders, which will then have to be repaid with returns. Previously, these types of loans were only available to individuals as consumer loans although this has changed to now finance businesses as well.
How does peer-to-peer lending affect small businesses?
There are several advantages and disadvantages to peer-to-peer business loans. One of the main benefits is that is can provide funding to small business owners who are not able to secure them from traditional banks or financial institutions or to start-up companies with no credit history. This makes it easier to secure a loan, especially when there is an urgent need for the funding. Another benefit is the anonymity between business owners and lenders. That being said, sharing personal information is encouraged as it may persuade investors to fund your business. Additionally, some business lenders may report to credit bureaus, and diligent repayments can, therefore, improve your credit rating, while it could be damaged by defaults.
On the other hand, this type of lending solution can be expensive to small businesses, as they tend to carry higher interest rates. Another potential drawback is that these loans usually have a fixed-rate, for a shorter term and available in smaller amounts than traditional banks. Peer to peer funding fills a gaping hole in the market, especially during these uncertain economic times. Businesses need to flourish, but with that comes massive expenses that are not always affordable. Peer to peer lending is ideal for entrepreneurs looking for smaller amounts to lend, although those looking for larger sums should stick to options like Merchant Money company loans for more suitable terms.