In recent years, companies like Prosper, LendingClub, and Zopa have been revolutionizing the world of finance by helping independent lenders and borrowers to cut out the huge corporate banks through Peer-to-Peer (P2P) lending.
Lenders can log in, view loan opportunities, and contribute money toward a particular loan. Because they do the research and take the risks themselves, lenders also collect the interest, with the company servicing the loan only taking an up-front fee.
This model of lending has facilitated many loans since its inception. However, only a small percentage of these have been business loans: the majority have been forrefinancing of consumer debt. This is because many aspects of the leading P2P lending networks are particularly favorable for this type of loan. However, noting the need for business-focused P2P lending, some new companies are answering the call.
P2P With Business in Mind
One company that is emerging as a leading P2P lending service for businesses in the United States is SoMoLend. Unlike Prosper and LendingClub, SoMoLend encourages lenders and borrowers to work through personal and local contacts. It provides the same basic streamlined loan servicing structure as other P2P lending services, but it does not have the same constraints. For instance, while the maximum loan amounts for LendingClub and Prosper are $35,000 and $25,000, respectively, SoMoLend does not publish any maximum amounts.
Due to beneficial political and economic circumstances, the UK has become one of the most active markets for P2P loans. While Zopa is the UK version of Prosper and LendingClub, Ratesetter and Funding Circle are the UK versions of SoMoLend. Unlike SoMoLend, though, these services do not focus on local loans: they simply offer the customary P2P lending framework with an emphasis on business loans.
As alluring as a P2P loan may be, interest rates are still reliant on the borrower’s credit score. Interest rates can vary from 6.59% up to 35.8%
Continued Value in Equity Investment
While P2P lending for businesses may provide an additional option in some circumstances, and while it may complement equity investment, it will never completely replace equity investment.
Just as high-risk startups with limited track records have trouble getting loans from banks, they have trouble getting P2P loans as well. Getting a P2P loan may be easier in many cases, but there are still situations in which it is simply not possible. Even when it is possible, lenders may not be willing to provide the full amount needed.
For businesses expecting a lengthy startup period in which they are not making profits, equity investment is usually more advantageous than debt, as it does not require a payout to investors until there has actually been a profit.
Despite the limitations and drawbacks of P2P lending for businesses, P2P loans can be a useful resource for much-needed cash. Combined with other sources of capital such as equity investment and factoring, P2P loans can help give small businesses what they need to survive and prosper.