Entrepreneur.com recently reported on a growing trend in SMB capital: peer lending. While the concept isn’t new, more and more SMBs are turning to it as an alternative to bank loans, angel investors and venture capital firms.
What Is Peer-to-Peer Lending?
To business owners, peer lending may look like a dream come true. No bank loans. No venture capital firms gazing at your financial records with an eagle eye. Borrowers can use their own personal credit history to prove their worthiness for the loan.
Most peer lending is accomplished through a clearinghouse, which processes the paperwork and vouches for the peer lenders (who must have both a net worth and annual income of $70K). But there are some things to watch out for:
- While many lending firms offer lower interest rates than banks, some don’t. These lenders are not subject to the same regulations as banks, so it’s a “borrower beware” situation. Have your lawyer and accountant look over the paperwork before signing a deal.
- You could pay origination fees of 2 to 5 percent for the loan.
- Your personal credit is backing the loan, which means you’re responsible to pay it back even if your business fails.
Online Accounting Management
The due diligence required when you go for a bank loan or funding through VCs puts your business in a very good place for success. The financial reviews and forecasts you’ll undergo before getting funding from VCs help you develop a clear business plan, determine how you’ll spend your invest capital, and even predict your ROI from the cash infusion.
It’s not recommended to go for any sort of loan for your business without having your books in order, and that’s where online accounting management can help. Having access to your financial records “in the cloud,” and the support of a full-scale virtual bookkeeping staff helps you manage your money and your business as a whole.
Peer lending may look like a good alternative to the red tape of banks and VCs but remember, many of the hoops you need to jump through to secure VC funding are in place to protect you as well as your investors.
