Startups can have a really torrid time finding enough money for business expansion and operations. Personal and family contributions are generally not enough, banks won’t touch them till they have a track record, the requirement is often too small for angel investors, and credit cards are far too expensive. Peer-to-peer lending can be an extremely viable alternative under these circumstances. Technology has allowed it to go online where it performs a unique matchmaking service between borrowers and lenders.
The Benefits of P2P Lending
In P2P lending, typically, no collateral security is required. Depending on factors like your credit score, the amount of the loan, and the loan term, and the reason why you want to take the loan, the P2P platform will assign you a risk grade that will dictate the interest rate applicable. Since, the online environment ensures very low overheads for the platform, typically, the interest rates are quite competitive with that offered by the banks and far lower than personal loans and credit card debt.
Where online lending platforms score tangibly over conventional banks is the speed of processing of the loan application and fund disbursement. Normally, it is possible to get the money into your account within a couple of weeks of applying. The entire process is online and there is no paperwork at all. Early repayment is possible without attracting any penalties and charges. As with banks, paying the first loan back without any delay or default helps you to establish your credibility and makes future access to funds faster.
Applying for a P2P Loan
There are quite a few established peer-to-peer lending platforms; however, borrowers will do well to find out which one is more suitable for their requirement. All of them consider your credit score to be extremely important and you should first see whether you qualify with your current score, otherwise, it is better to wait and improve your score before applying. It is very important not to go ahead and spend the money without first getting your loan approval because all applications do not get funding.
Borrowers will do well to keep in mind that apart from the interest rate, they will also need to pay closing costs that are normally around 5% of the loan amount, and which are deducted by the platform before the payout. It is recommended that you include this amount in your fund requirement estimate as otherwise; your objective may be jeopardized. In any case, make your fund projection realistic as borrowing less may be suboptimal and you may find yourself unable to repay the loan.
Before putting in a loan application, you should first confirm that it’s legal in your state as many states prohibit such transactions. Study all the terms and conditions in detail and opt for a platform that offers you the best deal. Look at other funding methods before committing yourself to the loan. Prepare a clear business plan and financial projections for your startup and borrow only what you really require; not too less or too much.