Small business owners are increasingly taking matters into their own hands when it comes to financing their enterprises. They are weary of bad lending terms and frustrated by being rejected by banks. This has led them to online peer-to-peer lending sites that match them with huge pools of lenders.
During the financial meltdown, regulators briefly shut down this sector, but it is once again going strong.
Lending Club Corp. and Prosper Marketplace Inc. operate the two largest peer-to-peer lending sites in the country. Both have reported a steep increase in personal loans used for small business funding. When businesses find traditional credit offered by banks unaffordable and need longer term repayment periods than offered by cash advances, more of them are turning to peer-to-peer lending.
This form of lending is relatively new to the U.S., first appearing just five years ago. Borrowers are charged a fee by the lending sites in exchange for access to a network of eager lenders. Each lender invests between $25 and $1,000 and is repaid with interest, minus a fee for using the site.
The interest rate is based on the credit rating of the borrower, as determined by the site.
Peer-to-peer loans are usually under $10,000 but some are $30,000 or more. The riskier the borrower, the better return for the lender. This created an environment of backing loans that banks reject outright or approve only at high interest rates.
Peer-to-peer lending spreads risk, so the loans usually have lower rates than those offered by banks.
These factors have resulted in peer-to-peer lending occupying a niche for small business credit. The Federal Reserve reports that up to 80 percent of U.S. small businesses have not submitted a bank loan application in the past five years. With peer-to-peer lending, they seem more likely to receive approval and a lower rate of interest.
