Small business owners have many options when they need funds. Of these, low-interest traditional bank loans are usually the first choice. However, everybody isn’t eligible for a bank loan. If you fall into this category of borrowers, you could turn to small business loans from online lenders or a comparatively new source of funds – peer-to-peer lending.
Although peer-to-peer lending has gained popularity in recent years, it’s primarily aimed at people who are looking for personal loans. However, some P2P lenders do operate in the area of small business loans. The most well-known companies in this segment are Lending Club, Funding Circle, and Prosper.
But should you borrow from a peer-to-peer lender? Or is it better to take a small business loan from some other alternative source? Before we answer these questions, let’s understand how peer-to-peer lending works.
What is Peer-to-Peer Lending Anyway?
A loan usually involves a financial institution like a bank or a credit union advancing funds to a borrower. But in a peer-to-peer loan, the relationship is between a borrower and an individual. The peer-to-peer lender, also known as a P2P lender, acts as a “go-between” or a middleman.
How does that help? Why eliminate the financial institution from the lending process? Doing this provides benefits to both the borrower and the lender. With the bank out of the picture, borrowers can receive funds at a lower rate, while investors (the people who are advancing the cash) can earn a higher return.
At least, that’s how it’s meant to work. But the peer-to-peer lender acts as a middleman and charges an “origination fee.” This could be a significant amount. For example, Lending Club, a popular P2P lender, requires borrowers to pay an origination fee that ranges from 3.49% to 7.99%. On a loan of $30,000, the fee could be as much as $2,400.
To gain an understanding of this type of financing, please read What is peer-to-peer lending first.
Advantages of peer-to-peer lending
⇨ The entire process is online. You usually don’t have to submit any paper documents.
⇨ Funds could be available in a matter of days. You wouldn’t have to go through a long-drawn approval procedure.
⇨ Most P2P loans don’t carry a prepayment penalty.
⇨ You can usually utilize the funds in any manner you like. Of course, usage is restricted to business purposes.
⇨ Borrowers who are turned down by banks may find that they can get a P2P loan.
Drawbacks of peer-to-peer lending
⇨ If you have poor credit, be prepared to pay a high rate of interest.
⇨ The amount that you can raise from a peer-to-peer loan is usually restricted.
⇨ Origination fees can raise the total cost of borrowing.
⇨ A delay in making repayments can harm your credit score.
⇨ Some P2P websites require you to pay various fees in addition to the interest that you are paying the lender. You could be informed of these “hidden” fees only after you take the loan.
⇨ A borrower could also be the target of a scam. The P2P lender could ask you to pay the origination fee and then disappear.
Should you borrow from a P2P lending website? Or would a traditional small business loan be a better idea?
Peer-to-Peer Lending vs. Traditional Small Business Loans
Let’s compare a peer-to-peer loan with a traditional small business loan from an established source like a bank:
|Peer-to-peer loan||Traditional small business loan|
|Rate of interest||It’s possible to get low rates, but you should have a good credit score||These usually carry low rates of interest|
|Borrowing limit||Most P2P loans are for relatively small amounts||Banks have high lending limits. If you’re eligible, you could borrow as much as you need|
|Speed of approval||You could obtain funds within a few days of your application||Normally a lengthy process. It could take weeks to get funds|
|Probability of getting a loan if you have poor credit||It’s possible – you may find someone willing to lend to you||Highly unlikely|
|Use of funds||Borrowers can usually decide how to use the funds||The lender will specify how the borrowed funds can be used|
Here’s a Venn diagram that illustrates the differences as well as the similarities between peer-to-peer loans and traditional small business loans:
P2P loan compared to small business loan
One of the most significant disadvantages of a traditional small business loan is that the approval procedure can be cumbersome. You could be required to submit various paper documents and wait for weeks to hear from the bank. If you want a quick response, a loan from Camino Financial, an online small business lender, could be your best option.
Now, let’s compare peer-to-peer lending with alternative small business loans.
Peer-to-Peer Lending vs. Alternative Small Business Loans
Alternative lenders can be a good option for small business borrowers. Their credit requirements are usually more flexible than those of banks. Alternative lenders also have another significant advantage. They can process a loan application very quickly.
Here’s how a P2P loan stacks up against an alternative small business loan:
|Peer-to-peer loan||Alternative small business loan|
|Loan amount||The loan amount from a peer-to-peer lender could be less than the sum you need||Possible to borrow large amounts|
|APR||If you have poor credit, be prepared to pay a high rate of interest||APRs are usually lower than those offered by P2P lenders|
|Document requirements||Minimal. But you may have to provide a business plan or justify why you need the money.||The lender will ask for your financial statements and your bank records|
|Funding time||Quick approval is possible||Quick approval|
|Use of funds||Borrowers could have the option to decide||You must use the borrowed funds for your business|
|Loan approval process||Online||Online|
Here’s a Venn diagram comparing P2P loans with alternative small business loans:
P2P loan compared to alternative small business loan
For most entrepreneurs, an alternative small business loan is the ideal way to raise money. Borrowing from a lender like Camino Financial can provide you with the cash that you need for your firm. Take out a little time to understand how Camino Financial small business loans work.
Camino Financial: Your Best Choice
At Camino Financial, we will do our best to provide you with the money that you need to run your business. Our motto is “No business left behind,” and we live by it.
Here are some of the advantages that you get with Camino Financial:
⇨ Like P2P lending, our entire process takes place online, being completely safe and effective. This allows us to provide you with fast funding, that can be as short as 2 days. But, unlike P2P lending, we offer you many more benefits.
⇨ The amounts of our small business loans range from $25,000 to $400,000, a larger amount than what you would probably get from a P2P loan, and are available at annual rates that range from 12% to 40.00%.
⇨ We only charge a closing fee and there are no other hidden fees. Your monthly payments are fixed and will never charge during the term of the loan. There is no early payment fee either if you decide to pay off your loan at any time.
⇨ Our requirements are very flexible. For example, you don’t need an SSN to apply. Your ITIN with suffice.
⇨ You don’t need to put up any collateral either.
⇨ You don’t need to have a minimum credit (FICO) score to apply, and neither do you need a credit history.
⇨ If you repay your monthly installments on time for nine months or more, you could get a new loan for a larger amount and at a lower interest rate.
⇨ We provide customer service in both English and Spanish.
⇨ Our loan specialists will assist you at every stage and help you to get the lowest possible rate on your loan.
⇨ We provide borrowers with access to a host of educational resources that are updated regularly.
⇨ Our customers are happy to work with us because they get individual attention and support from our dedicated team of professionals.
If your company requires funds, apply today for a small business loan. You’ll know instantly if you prequalify and it doesn’t affect your credit.