Financing Small Businesses with Peer to Peer Lending


financing small businessesLack of financing and poor cash flow cause 95% of small business failures within the first five years of startup. Having a cash flow plan is essential for the long-term stability of any business.  Yet many small businesses struggle with finding adequate financing when the inevitable cash shortage happens since it is often difficult for these newly formed businesses to obtain funds from traditional financial institutions.  Peer to Peer Lending fills this gap in small business financing and provides an important source of short-term financing for small business owners.

 

What is Peer to Peer Lending?

Peer-to-Peer Lending is a method of obtaining funds for a small business or personal use where borrowers can obtain a loan from other individuals via a P2P lending platform. Peer-to-Peer lending platforms allow borrowers to view offers from multiple lenders and then select the loan that offers the best terms. Since lenders are competing for your business, customers often benefit in the form of competitive rates.

 

How is Peer to Peer Lending Different From Other Types of Small Business Financing?

Many small businesses are started with seed money from friends, family and the business owner themselves.  Other sources of financing for small business owners are equity financing, debt financing, and alternative financing such as peer to peer lending.

Equity Financing involves an exchange of capital for a partial share in ownership of the business. Financing a business through equity financing allows a business to obtain funds without incurring debt and at the same time avoiding the drain on cash flow from periodic debt payments. Another potential upside to equity financing is the possibility of finding an equity partner who is willing to provide his/her expertise to your growing business.  Business expertise can be invaluable especially to a startup company that has limited human and physical capital.  One obvious downside to this type of financing is that you now share ownership of a portion of your business with an investor.

Debt Financing as it's name suggests, is a form of financing that involves borrowing money that must be repaid over time with interest. Lenders do not gain an ownership interest in the business, and loans are often secured by assets of the company. In addition, many lenders require the borrower to personally guarantee the loan in case of default by the business.  Typical sources of debt are banks, credit unions, savings and loans, SBA guaranteed loans, family and friends, and commercial finance companies.

Peer-to-Peer Financing is similar to debt financing in that funds are borrowed from a lender and is paid back over time with interest. One advantage of this type of financing is that loans are unsecured and do not require the borrower to put up collateral.   Not having to put up collateral can be important for a small business owner who may need to obtain additional financing at a later date.

 

Why Small Businesses are Turning to Peer-to-Peer Loans for Financing

A top reason businesses fail in the U.S, according to the Global Entrepreneurship Monitor Report, is problems obtaining financing and inadequate cash flow.  With over 50% of new businesses failing in the first year and 95% within the first five years, it is crucial for businesses to carefully prepare a cash flow analysis to ensure funds will be available for payroll, inventory, and other expenses each month.

Traditional financing obtained through banks can be difficult for an entrepreneur just starting out without established credit or a proven cash flow history.  Credit score, the amount of debt to income the business is carrying, and credit history are looked at carefully in determining credit risk.

There are many P2P loan platforms out there and even more lenders from which to choose so it is imperative that you properly vet any lender you intend to do business with.  One such lender that has been in business since 2011 and has loaned over $1.6 Billion to help businesses grow is Kabbage.  They provide lines of credit of up to $100,000 via a simple and quick online application process where potential borrowers link bank, Paypal, Quickbooks, social media, and other accounts to their application. This yields a more accurate and complete picture of the borrower's business and approvals happen in mere minutes versus days or weeks for other types of lenders and funds are available immediately or days depending on how quickly Kabbage can verify application data and your chosen method of payment.

As any small business owner knows, challenges occur on a daily basis that require immediate and decisive action. Delays can result in lost business and added expense, something that can impact cash flow and ultimately cause a business to fail if not addressed. A Peer to Peer Loan can provide an immediate infusion of cash that can be used to provide funds for business operations while waiting for a payment from a customer, pay for a new growth initiative, or fund an emergency repair on a piece of equipment.

 


Huge Discounts on deals right NOW!

Stay Connected with The Frugal Toad

Subscribe to our e-mail newsletter to receive updates.

, , , , , , , , ,

One Response to Financing Small Businesses with Peer to Peer Lending

  1. Jack 07/11/2016 at 2:39 pm #

    So good to see P2P lending rocking the boat for borrowers as well as investors!

    I’m a big fan of P2P investing, and have put my money where my mouth is by moving some of my retirement savings to Lending Club.

    But that said, I would be worried as an investor about loaning my money to a business for startup or ongoing costs. As you point out. many businesses fail due to cash flow reasons, but bottom line, they fail. As an investor, I’d rather loan my money for other purposes, and avoid that inherent startup risk.

Leave a Reply