Of the almost 60,000 loans that have been originated through Lending Club and Prosper in the last five years we know a good portion of them have gone to fund a small business. The official numbers are around 3,500 loans or 6% of that total.
These are 3,500 businesses (there are likely more than that because not everyone states their exact loan purpose) that might otherwise not have been able to get a loan. With the excruciating tight lending standards of the last couple of years most small businesses have been left out in the cold. And with falling home prices, people have not been able to fall back on home equity lines of credit like they did in the past.
Small Business Credit is Almost Non-Existent
Getting credit for a small business, particularly a startup business is never easy. I know the pain of this first hand. As a startup business owner in the early 1990’s I was desperate for money. No bank would lend to a business that had no history and I couldn’t get a personal loan either. So, I resorted to that most convenient (but expensive) of funding tools: the credit card. I remember one month I couldn’t make payroll, so I took out a $7,000 cash advance to tide me over. I don’t remember the interest rate but I am pretty sure it was well over 20%.
This $7,000 was what I needed to get through a difficult period, but this story has a good ending. With this money I was able to get the business cash flow positive and we became a nice profitable little business, which I sold in 2005 to help fund a new business I had started. But for a while there, things were very much touch and go. I paid off the credit card in about a year and have never had to use that kind of funding again. But it would have been great to have had the option of peer to peer lending back then. It could have saved me hundreds of dollars in interest and made success that much easier.
P2P Lending May Be a Business Owner’s Best Option
Last week TheStreet.com reported that peer lending is growing as a business owner option. It gave the example of an entrepreneur who owns a car wash and needed a $16,000 loan to expand his business. When he was turned down by his bank, he sought out p2p lending with Lending Club where he received his $16,000 loan. More businesses are turning to peer to peer lending these days because they really are an entrepreneur’s best option. If you have decent personal credit you can get a loan, because both Lending Club and Prosper lend to the individual and not the business. Of course, if your business goes belly up you are still on the hook for the loan, but the same would be true if you funded the business with credit cards or a personal loan.
Most startup businesses are starved for cash. A few years ago Inc. magazine reported that half of all start-ups are financed with credit cards. With the tight credit markets of today I would guess that number is even higher now. The biggest problem with credit cards is the high interest rate, it can cripple a start-up business that is trying to get established. A much better option is a three or five year loan from one of the p2p lenders, Lending Club or Prosper. You can obtain loans for up to $25,000 and interest rates for borrowers average around 12%, with lower rates available for people with excellent credit.
If more entrepreneurs used p2p lending for financing their small businesses I am sure we could reduce the number of business failures. Often all a small business needs to get over the hump is a little extra cash. And if they can pay this money back at a reasonable interest rate that will only help their chances of long term success.