One of the biggest issues that every entrepreneur will have to face at some point is finding financial backing. Money is going to be essential for your business launch, and there are a variety of methods for obtaining that much-needed financial support. One of the most popular solutions is Peer-to-Peer lending (P2P). This is a useful way of getting the money you need without going through the traditional route of obtaining interest only bank loans. Those banks loans can be slow and expensive, so does P2P offer a viable alternative option? Here’s the rundown of everything you need to know about P2P loans.
Explaining the P2P loan
Rather than going to a bank, P2P loans come from private individuals and investors. If someone has money that they want to invest in a business, then there are now a wide variety of websites that allow them to look at the business marketplace and find relevant businesses that they think have potential. There are a number of benefits to P2P lending that banks are not able to provide, and that’s one of the reasons why they are growing in popularity.
What are the benefits of P2P loans?
With growing numbers of people opting to source their funding through P2P lending, it can be easy to assume that they beat traditional bank loans in every way. That’s not exactly true, but P2P loans do come with some noticeable advantages.
- Lower interest rates: Banks have their own set rates when they do approve a business loan. Interest rates on bank loans can be high due to the infrastructure and overhead costs of running a bank. P2P loans give you far greater control over the amount that you eventually pay back because you get to choose the investor that you go with. Some entrepreneurs fund their business launch using credit cards, and this can actually be a cost-effective means of sourcing a competitive payback total. Compare your overall debt potential before you commit to any form of loan and make sure that you have assessed the comparative repayment rates.
- Speed: A bank loan can take a long time to approve and then process. If you’re looking at government funding like an SBA, it can take six months from your application date until the money is in your account. P2P loans are a much faster process. The application process itself is very quick and straightforward, and you will get a positive or negative answer very quickly. If you do get approved for a P2P loan, the money could be in your account within days rather than months.
- Credit issues: You will not be able to get business loans if you have a bad credit score. While having a bad credit history will usually result in higher repayment rates, it’s good to know that it remains an option. Bad credit is no longer the limitation for entrepreneurs that it used to be, but you will have to address this in your application.
The disadvantages of a P2P loan
While the potential benefits of a P2P loan are reasonably straightforward, the cons are not quite so clear-cut. Don’t fall into the trap of thinking that obtaining a good P2P loan is going to be simple, or even suitable for your business model. There are flaws.
- Abundance of choice: It might not sound like an issue, but with so many potential lenders available, it can be time-consuming to find the best one for you. It’s vital that you don’t rush through the process, and that you take the time to find a genuine lender.
- Less anonymity: Many entrepreneurs take the step of acquiring more than one P2P loan. This is an effective means of raising more money while being able to spread your repayments out. However, it’s worth remembering that those lenders will need to communicate with each other. That public discussion can be jarring for many.
- Wasted time: Sometimes, you will spend a lot of time finding the perfect investor, go through the process of requesting a loan, and even get approved. Only to find that the money simply never materializes and the lenders online profile has vanished. This can cripple a business launch, especially if you have been relying on money that you thought was already guaranteed.
P2P mistakes to avoid
Because P2P loans are quick and convenient, many people leap into them with little thought. They see the money and how it can help their business, and they think little further than that. However, you should strive to avoid the following mistakes that are all too common:
- Credit Score Acceptance: If you’re applying for a P2P loan because you have bad credit, it might be worth working on that before you start applying for loans. That’s because your repayments will be based on how good your credit history is. Often, taking some time to work on your credit score will pay you back later with interest rates that are substantially lower.
- Continuing bad spending habits: Having a fresh injection of cash into your business can very easily lead to overspending. If you know that you’re prone to overspending, then it might be wise to let someone else have the bank card for your business. Overspending when you have already received your P2P loan could mean that you do not have the finances available to buy the things that you actually need for your business to function. Make sure that your loan is used for the purposes that you intended, whether that’s for equipment financing or for paying the first six months rent on your premises.
Peer-to-Peer loans are beneficial, but they are not the best source of financial backing available for the entrepreneur.SBA loans may be one of the slowest ways to get money for your business, but they are head and shoulders above every other option.
There are also alternative funding sources like charities and schemes that can provide you with grants rather than loans. Like SBA’s and bank loans, these can take a long time to receive, but with fewer risks and reduced repayment rates, they can be much more beneficial. P2P lending is useful for those that need a financial boost in a hurry, but you should always look at your alternative options before you commit to the wrong terms.