Peer-to-peer lending is less commonly mentioned than crowdfunding, but it is a potentially fruitful way to get your project off the ground. Like a traditional lending source like a bank, the P2P lending investor cares most about whether the person can repay things. Yet one significant difference between traditional borrowing and P2P loans is that there is not always clear collateral – the investors don’t want to go through the trouble of taking something if the loan is not paid back and instead choose the person to invest in more carefully to begin with. They know that if your project is unsuccessful, there likely won’t be anything to take! Thus, the bottom-line key for anyone looking to attract P2P lending is ensuring you appear likely to pay things off.
Peer-to-Peer Lending – Getting Notice
Sometimes peer-to-peer lending investors will jump in based on your past – have you been successful in prior projects, and would loans at that time have been paid off? But they will also want to know that the project they are funding will likely succeed, even if they don’t need it to be a blockbuster to get their money back. As opposed to crowdfunding, peer-to-peer investors aren’t willing to take a significant risk for a substantial potential reward; instead, they want the project to have an excellent chance of being good enough to succeed to a degree that gets them their promised return.
Peer-to-Peer lending, Initial Steps
The steps toward getting peer-to-peer loans for your project are often relatively straightforward and include information about you, your project, and your company’s current financial standing. All of this can help the potential P2P loans lenders decide whether to invest in you (keep in mind that investors have often provided the P2P lending platform with criteria ahead of time as far as what types of projects they want to invest in and what financial background they will accept – how much risk they will take on.)
P2P Loans vs. Bank Loans
The underlying question for all of the above is whether you should pursue a P2P loan or a bank loan. Now in some cases, this choice is relatively easy, given that banks can be particular about what they will fund and many purposes, especially those without clear equity in something that the bank can own if you fail to pay (a house, car, business, etc.), are not fundable with traditional loans. But for those cases where the bank might fund your project or purpose, how do you choose between P2P funding and a bank loan? There are only three things to consider, and the first one may be the only central decision point:
- The loan rate is a significant piece of decision-making when you actually have a choice between peer-to-peer loans and bank loans. You may be able to get a significantly lower rate from the crowd.
- the rates may be similar in other cases, but the terms may differ. In crowdfunding, you may get longer-term, more variable payments or other unique terms that better fit you or your project.
- Finally, there may be added advantages in getting P2P lending, like the crowdfunding perks we list elsewhere, including having investors provide a little PR and excitement about your project.
Disadvantages of Peer-to-Peer Lending
For some, P2P Lending is not the best choice. This may have to do with the project you are proposing or the crowdfunding of your project. Before you choose peer-to-peer loans, you need to make sure that you know all your potential funding options, including traditional bank loans. Here are some of the possible disadvantages you might discover:
- You may find that the crowd who wants to find your project will be more demanding as far as details they will want to know along the way. The reporting requirements may be daunting, and you may find that you will have added stress when you have been unable to work on the project, yet the lenders want an update.
- The terms of your peer-to-peer lending contract may not be as favorable as you expect, again often depending on the project. In areas where you cannot find investors that are deeply committed to a particular size or type of project, you may find that the terms are not that different from the loans you can get from traditional banks.
- P2P lending may not even be available for your project, even after you put a lot of time and effort into finding investors. Again, this may be especially true if you choose a project that few investors are interested in. P2P loans may seem easy to get, but unlike traditional loans, there is actual competition to get them.
Conclusions Regarding P2P Lending
P2P loans are attractive for many entrepreneurs who otherwise have to give up too much equity or take high-interest bank loans. Yet it is difficult to convince the crowd that you are a good bet for peer-to-peer lending because crowdfunding investors often want a higher or more secure payback. You’ll need to be quite compelling about the chances that investors will get a return that outpaces other options. We are quite familiar with the various peer-to-peer lending platforms and how to create a compelling P2P lending pitch. Please feel free to contact us for more information. And remember that our services are fully guaranteed. If you are an investor reading this, Forbes put together some helpful guidance regarding peer-to-peer lending.
