By now, everyone has already heard of VC Funding, Angel Funding, Bootstrapping techniques and other financing strategies for aspiring entrepreneurs who wish to open a business. As we are still trying to recover from the economic slump, creative ideas on funding keep on coming and this is good news for small business owners who are constantly trying to improve their businesses.
One idea is peer-to-peer loans. The concept behind P2P loans is plain and simply microfinancing. This means that any number of lenders can loan small to mid-sized businesses with money ranging from $25 to $1000 with interest. The difference though between crowdfunding and P2P is that the latter is a for-profit business.
Peer-to-peer lending isn’t really a new idea. In fact, you could say it is making a come back. P2P was first introduced in February 2005 when access to credit was tight. The terms used for this type of financing are: Person-to-Person Lending, Social Lending, Peer-to-Peer or P2P. Whichever term you want to use, it all boils down to one thing: lenders loan you money without going through any financial institutions. It is considered a by-product of the web. A certain website becomes the middleman between small business owners/aspiring entrepreneurs and lenders. The middleman (in this case, a P2P website) brokers the loan and charges interest.
Advantages of P2P
- To lenders, P2P loans generate income which is in the form of the interest of the loan given. Borrowers have more chances of getting credit especially when most financial institutions are conservative when it comes to loans, especially for start up businesses.
- Applying for P2P loans is easy. All you need to do is fill out an application form on P2P websites. Once your loan is approved, you would just need to wait until your loan is funded.
- One other advantage is the speed that which the loan is applied for and the approval process. Since there isn’t just one lender, it is relatively easy to fund, say a $35,000 loan.
Disadvantages of P2P
- While the process is fast, if there aren’t enough lenders interested, you might not get enough funding for your business.
- Lenders are anonymous. Therefore, it might pose a risk for borrowers as there are documents you need to sign. Signing documents in agreement of a loan being provided by unknown investors is a risk that some business owners would not be likely to take.
- For borrowers, these loans are not insured by the FDIC and therefore, any losses would be unrecoverable so you should always exercise prudence.