Peer-to-peer business lending is increasingly popular and provides an alternative to traditional loans and crowdfunding. In other words, while some businesses turn to conventional lenders like banks for loans that might pay for ongoing operations, expansions, or times when money gets tight, others turn to crowdfunding, where they make a specific pitch for how the funds will be used, peer-to-peer business loans allow a business to get money from people with less of a particular pitch necessary. For peer-to-peer business lending, the business provides some of the same information it would for a bank loan, but instead of a bank, there is a group of peer lenders at the other end of things when it comes to peer-to-peer business loans.
If you are a business owner, we can help you find the right platform and make the best pitch, but first, we wanted to provide this general guide.
The Case for Peer-to-Peer Business Lending
Peer-to-peer business lending often carries slightly to moderately lower interest rates than traditional bank loans, and in some cases, more flexible terms are involved. Investor in peer-to-peer business lending still gets an excellent return and can carefully choose which business they want to support. The business can get the money that the bank may not have given, or that would have been wrapped in unfavorable terms, and they also get peer backers who might provide positive PR and other types of support.
The result of peer-to-peer business lending is usually a win-win, and the challenges are primarily up front as the investors decide which business to fund and the companies vie for the attention of what can be a limited number of peer funders. Finding Circle covers peer-to-peer business loans and includes a well-known and easy-to-use peer-business lending platform
Peer-to-peer business lending types
There are several types of peer-to-peer business lending, all of which have attracted investors. They include:
Peer-to-peer business lending for geographical expansion:
This type of peer-to-peer business lending is used to expand into new regions, whether the whole business is expanding or just a product roll-out in a new area. These loans are often viewed as a slightly lower risk because, in most cases, the company is taking a product or service that has been successful and scaling it. Of course, there may be reasons why it will not be as successful in the new region, but the fact that this is not a brand-new endeavor can make investors more confident and willing to invest.
Peer-to-peer business loans for a new product or service:
Sometimes the company wants to develop a new idea, and the peer to peer business lending will be used for this development and implementation. In less risky cases, the new product or service is directly based on something successful for the company – a slight change or an addition to an existing line. In other cases, it is a brand-new idea that will still capitalize on the company’s past success using the same marketing plan, equipment, sales force, etc. This may seem more risky than expansion, but there is also more upside.
Peer-to-peer business lending for upgrades:
Whether to upgrade equipment, add to the sales force, move into a new building, or buy new hardware and software, these types of peer-to-peer business loans for improvements can be quite valuable for the company on the rise. Many businesses find themselves a few upgrades away from profitability, needing to make their product more cheaply or move into a larger space to create growth, and this type of peer-to-peer business lending can create that path. It is also not tremendously risky for the investor.
Peer-to-peer business lending for working capital:
This may be the most common need for almost any business, especially one that is new or somewhat new. A company can find itself short of cash after an expansion, a downtime, or because many expenses come simultaneously. In this case, peer-to-peer business loans are needed to fund ongoing operations. For a promising company, investors may see an opportunity to become a part of things.
Applying for Peer-to-Peer Business Lending
Of course, the application process for peer-to-peer business loans depends on the type of lending you are looking for. Yet the process of securing funding revolves around three primary goals:
Peer-to-Peer Business Loans and Uniqueness
It would be best to stand out from others looking for peer-to-peer business loans. Why should investors choose your pitch – why is your product or service unique and likely to attract success? Or why will this particular upgrade or expansion truly work? What is exciting about your company and what it provides? There will be many choices for potential investors with the same risk profile as you, so you may need to stand out in another way. The actual mission of your company and its products and services need to stand out. Remember, the crowd will have a lot of choices, and you might want to review the other ones similar to yours and see how you can make yourself unique.
Peer-to-peer business loans and risk
You may need to be less risky than others looking for peer-to-peer business loans. There are many types of investors for peer-to-peer small business lending, those who want to make the most money in interest payments and those looking to round out their investments with a good but safe return. You need to know your likely audience and ensure your pitch fits. In other words, if you are making a pitch that you know is high risk/reward, you will likely have to pay more interest and convince investors that you will succeed. On the other hand, if you have a lower-risk pitch and will only be charged a low rate, you need investors to know that your service or product is still worthwhile despite the lack of a high upside.
Peer-to-peer business loans and your credit
It would be best to show your creditworthiness to get peer-to-peer business loans. Most investors want some assurance that the company they are lending to, and of course the people behind it, are worthy of the credit they will extend. Especially in the case of a company that has been around for a little while and is now looking for peer-to-peer business lending for expansion or improved operations, you will want to give information on how effectively you’ve used capital investments in the past and how much you’ve faithfully paid back any business loans.
As excited as the investors may be to give you peer-to-peer business loans due to excitement over your proposed purpose, they will still want to know how well you’ve managed loans in the past.
Investing in Peer-to-Peer Business Loans
Suppose you are on the investment side of peer-to-peer business lending, the above holds. In that case, you will look for a business venture that stands out from the crowd, has a good risk/benefit ratio, and looks reasonably secure from a credit history perspective. Yet these three ways to narrow things down will not be enough because you’ll still be left with many viable choices. Here are some additional factors to consider.
The fit with the ask
Perhaps you are generally someone who likes to invest in businesses improving operations and maybe even proposes improving processes in a specific way. Perhaps you want to invest in promising new products. Maybe you like investing in geographical expansion and even have a particular geography you are attached to. Or finally, perhaps you want to support a specific type of business, maybe with who the leadership is, where they are located, or what they create or do.
The interest you have in the product, service, or purpose
With peer-to-peer business lending, you have enough choices as an investor to pick something that you will genuinely enjoy backing and following the progress of. You may choose an area you know a little about or hope to learn more about. Or maybe you will choose an area that you find quite exciting or interesting. There can be added benefits to your choices beyond having them be fiscally sound, and you may want to list what would make for the best investment.
Type of Peer-to-Peer Business Lending
How much will your investment help? Do you want to be part of a large crowd that makes a peer-to-peer business lending investment in a product or purpose, or do you want to be one of just a few? In the former case, the risk is spread, and there is some comfort in the fact that so many investors felt as positively as you did. However, in the latter case, where you are one of the primary investors, you may feel a larger sense of ownership and responsibility for success.
Summary and Conclusions
Peer-to-peer business loans are growing in popularity and availability. Whether approaching this possibility from the investor or business side, you should do your homework and ensure you have covered all the essential details. This innovative way for businesses to get support for expansion, growth, and improved operations can be very fruitful on both sides—best of luck pursuing Peer-to-Peer Business Lending, whether you are an investor or business owner. If you are the latter, we can help you find the right platform and make the best pitch! Contact us any time.
