P2P (peer-to-peer) lending websites (also known as ‘social lending’ sites) have been at various times touted as the hot new thing in consumer lending. While the number of loans they make is tiny compared to the banks and credit card companies, the credit crunch has helped some of them grow their lending volume. Small business owners are turning to P2P lenders when banks say no.
Now, I need to say upfront that the business credit purists don’t like this option and I understand why. These loans are not true business loans. You apply based on your personal credit qualifications, not your personal credit. And they will be reported on your personal credit as personal loans, affecting your credit scores. (There should be less of an effect than by maxing out a personal credit card, however, since these are installment loans.) The loan amounts are also small, capping out at $25,000.
However, if you have good credit and can document your income, they could provide enough money to get a small bootstrapped business off the ground.
Prosper.com and LendingClub.com are the top lenders in the space. Other players, such as Zopa, have come and gone. P2P Lending News reports that Virgin Money is letting its business fade away, and also says that Pertuity Direct, another P2P lending platform, appears to have closed shop. (I can’t access their website, so I presume that report is correct.)
While writing this post, I perused the loan requests that are trying to get funded. Here are a couple of examples from Lending Club. The first one sounds like it comes from a seasoned entrepreneur, the second from a start-up:
Our business is launching in Dallas November 2009 and in Chicago after the New Year. This loan gives us additional working capital to generate $440K in new revenue with 28% gross margins. We’ve been in business since June 2001 with monthly income exceeding $23K/mo. Credit history: 14yrs, 700TU, 691EQ, detbt/income = 0.19.
This loan is to manufacture a NEW, non-existing, baby product that eliminates opening and closing containers, avoids spills, eliminates measuring, saves time, is easy to use, and best of all it is portable. Now a parent/caregiver will be able to prepare a baby’s bottle anywhere, anytime, fast, easy, with the push of a button…What makes me a good borrower is: I currently have a stable job. I am a FedEx Home Delivery driver and earn 750 a week. I have no bills other than my cell phone and 200 dollars of rent (I live with my parents)…So, aside from paying off my debts, which are now 80 dollars a month combined, I have been investing heavily in this product. All paperwork and prototype are done. The production cost is 3 dollars a piece and the retail is going to be from 10-15 dollars. (edited for length)
I haven’t used either platform as a lender or borrower, but I’ll confess it is kind of fun to read the pitches. The second one appeals to me, as I remember measuring out scoops of formula when my daughter was a baby. If there had been a product like that, I would have bought it.