A major player in the ever-evolving business financing industry is peer to peer lending. Small business owners are looking for increasingly easier ways to obtain business funding, and for many of them, companies like OnDeck and Kabbage are a sensible solution. The approval process for a peer to peer business loan is very different than that of a commercial bank or a company like United Capital Source. Rather than submitting a conventional application, potential borrowers make a profile on a website. This profile is made available to lenders and investors who can then decide to offer financing.
The rise of peer to peer lending can be attributed to at least two factors. First is the low interest rates. Investors compete to offer better rates and unlike banks, the only expense they have to worry about is their website. This alludes to the second factor, which is the amount of money investors can make through steady interest payments. Even business loans with very low rates can earn an investor more money than other means.
Despite these conveniences, peer to peer lending is just like any other form of business financing in that it has its drawbacks. Here are four things you probably didn’t know about peer to peer lending:
Before creating a profile on a peer to peer lending platform, you have to fill out an application. Once this application is approved, you are then given permission to create a profile for investors. These two tasks are nowhere near as tedious as applying for a bank loan. You don’t need to create a comprehensive business plan or compile mountains of other paperwork. But compared to online lenders and companies like United Capital Source, the full application process for peer to peer lender takes more time. Filling out an application for the former two lenders takes a couple of minutes, with very little paperwork involved. You can probably apply for a credit card online in less time than it takes to fill out a peer to peer lending profile.
Online lenders and companies like United Capital Source have the ability to approve and fund nearly every application they receive in under 48 hours. This is the longest it will take them to make a decision, no matter what. Peer to peer lenders can match this time frame, but not with every potential borrower. Your approval and funding time depends on the likelihood of a lender or investor taking interest in your profile. This often happens within a few minutes to a few days but some borrowers have reportedly had to wait several weeks before hearing from an investor or receiving funding. So, unlike the two other types of lenders, peer to peer lenders cannot technically guarantee that every potential borrower will be contacted by an investor or funded within the same time frame.
In most cases, your chances of being approved and funded by a peer to peer lender depends largely on personal credit score and debt-to-income ratio. Each platform and investor, however, has their own criteria. Some platforms and investors might place higher value on certain requirements than others. Be sure to research the platform’s approval requirements before filling out an application.
Your profile also gives you the opportunity to explain why you need funding. Depending on the platform, this part of the profile could be crucial for attracting lenders or investors. Let’s say there are two potential borrowers asking for the same amount of money. One potential borrower has stronger credit history but the other composes a more enticing profile or does a better job explaining the purpose of the loan. The second borrower might be more appealing to the lender or investor who happens to be examining both profiles.
Anyone with experience in debt financing knows that low interest rates usually come with a catch. For peer to peer lenders offering extremely low interest rates, that catch is fees. Since the interest rates are so low, these lenders depend on fees to finance the growth of their platforms. Fees will likely be higher for potential borrowers with lower credit scores. Many inexperienced borrowers have been deceived by low rates and ended up paying high fees. This is why it’s probably best to choose an offer from a lender or investor that contains a sensible interest rate; not too low but not too high.
If there was one thing to always keep in mind about peer to peer lending, it’s to be just as cautious as you would with any other business lender. Every type of business lender has its drawbacks. They attract borrowers who, because of their financial health and industry, view their biggest drawbacks as merely a minor inconvenience. So, before committing to peer to peer lending, research all of your options. Even those who have taken out numerous peer to peer loans throughout their careers will likely admit that it took some time before they found the right lender. You’ll never be able to carry out your desired investment properly if you still aren’t sure you made a good decision.
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