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Is Peer-to-Peer Lending the Right Way to Jumpstart Your Business?

Co-workers Talking About Peer-to-Peer Lending

The world of finance is becoming ever more diverse, powerful, and complex. The challenge is to learn how to harness all of these forces to your advantage.

If you manage, you’ll be on the fast track to success. If not, you can look forward to falling victim to the ever-increasing number of financial traps laid out for you.

The stakes are high. The right kind of financing can jump-start your business. The wrong kind can kill it.

When looking at the cutting edge of financing, peer-to-peer (P2P) lending is right up at the top. So how can you decide if marketplace lending is right for you? How can you tell if it will help or hurt your business? Read on — we hope this post will help you figure the answers.

Success Begins with Understanding the Basics

P2P loans use the traditional structure of a business loan, combining it with the power of crowds harnessed by the internet. If that seems simple, it’s because the basic idea here is simple. What’s complex is how different sites connect borrowers and lenders, calculate rates, and structure payments.

Of course, if you’re going to use any of the most popular sites like Prosper or Lending Club, you’re guaranteed to get a relatively uniform service. How, then, should you decide exactly if P2P lending is right for you and your business?

The Biggest Advantage of P2P Lending Is Reliability

Let’s face it, if your business needs financing for a new venture, there’s nothing worse than facing real uncertainty about whether or not a loan will be approved or a crowdfunding initiative will work. P2P lending largely takes that risk factor out of the equation.

How exactly does P2P do this? By connecting you with a huge network of potential lenders. The sheer diversity offered by these kinds of networks means the likelihood of you getting funded is extremely high.

Connected to this is the relative simplicity of P2P lending for small businesses. The process of applying generally takes a few minutes, and you can often have your funding within a few short hours. This speedy acquisition of capital is another marked difference between P2P lending and traditional bank or business loans.

An Overlooked Aspect of P2P: Benefits to Your Credit

P2P loans are reported differently than most loans when it comes to calculating credit. While most bank loans revolve loans without a fixed repayment schedule, P2P loans are more structured. This means using them adds to credit diversity, boosting your credit score.

While P2P loans do involve a credit check, something else which affects your credit rating, they generally begin with ‘soft check.’ This is a type of credit check, which doesn’t impact credit standing. A normal ‘hard check’ will only occur once you’ve been approved. That means you don’t have to worry about numerous harmful credit inquiries, which will damage your score. You can find a loan opportunity, which actually works both for you and the lender by bypassing this standard, but destructive, routine.

The advantages come down to options, flexibility, speed, and reliability. These four make up the basis of P2P lending’s recent success and popularity. But, of course, these advantages also translate into some unavoidable disadvantages, meaning that P2P loans still aren’t for everyone.

Downsides to P2P Lending You Should Consider

The biggest downside to consider is the interest rate. This generally depends on your credit score, which can range from 7%–22%. Truthfully, this is a blessing and a curse. It means even those with bad credit can get a loan, but it also means P2P loans can be more expensive for borrowers.

You can always create a shorter set payoff period for the loan, if you’d like to cut down on the interest rate.

The Biggest Advantage of Finance Today Are Your Diverse Options

If your company has a great story behind it or already has a top notch marketing team working on promotion, crowdfunding might be a better option than P2P lending. Working capital financing is another excellent alternative for businesses past the early stage.

In general, it’s important to consider all of your financing options everytime you need financing. The best option will depend largely on what you need the capital for and how you’re going to make the money to repay it. With the speed, at which finance is changing today, assuming everything works the way it did 5 years ago, blindly choosing a random (or traditional) solution can be a costly mistake.


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