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Many small businesses feel that access to credit is still tight. But even in the best of times, we now know that every entrepreneur needs a couple of financing choices under his or her belt. Peer-to-peer lending may be an option especially for small loans, an alternative to family and friends or the credit card.

Peer-to-peer lending is part of a general disruptive trend that puts consumers (of car rides, places to sleep on vacation or meals) directly in touch with providers (people who can give you a lift, have an extra bedroom or cook) without the regulatory costs, protections and filtering that go with the man in the middle. Especially to the extent that they are offered as personal loans rather than business loans, they may be a mixed blessing for small businesses.

How Does Peer-to-Peer Lending Work?

It is pretty straightforward on the borrowing side. The borrower fills out an application for an amount, usually up to $35,000, describes the purpose of the loan and places the application online. Although most P2P loans are personal, some companies are beginning to focus on the small business market, offering amounts up to $1 million. Lenders then put money towards the loan, sometimes as little as $25. When a collective group meets the borrower’s amount, the loan is granted. The borrower’s interest rate is set by the lending service on the basis of the borrower’s credit. The loan is then paid back just like a traditional loan.

The Good News and the Bad News

The good news is that there is no middle man.

  • Businesses without access to credit from more traditional lenders may find it in P2P lending.
  • P2P sites may be more willing to lend the relatively small amounts fledgling businesses may need.
  • The interest rate may also be lower than a bank rate, especially for those smaller amounts.

The bad news is that there is no middle man. Think for a moment about the risks of a banking industry with no government backing and no government regulation. Lenders can clearly get burned if the default rate gets too high, but borrowers might be hurt, as well, with insufficiently disclosed or deceptive repayment terms. If you are reluctant to sleep in a stranger’s spare bedroom, you may not be comfortable with a debt owed to an invisible consortium of lenders.

Part of a Solution

The goal is to get to a situation where your personal credit and your business credit are separate, and the latter is cheap and abundant. Borrowing is a way to invest in your business's creditworthiness. P2P borrowing, especially if it is personal rather than a business, may not do much to advance this change in status except, of course, to the extent that it helps you build business profitability. It's a judgment call.

But you have to start where you are. On your way to the promised land of huge revenues, a very large line of cheap business credit, bluebirds in the trees and white sand beaches, you may occasionally have to deal with tight credit. P2P lending may be one  of many alternatives to consider.


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