Last month, Google made waves when it was announced that it would be investing in the peer-to-peer lending start-up, Lending Club. This was a big deal because, well … it’s Google. For one of American’s biggest behemoth companies to invest in a new-ish business model like peer-to-peer lending showed serious confidence in the platform. Admittedly, the investment of $125 was small by Google’s standards, and according to the New York Times makes up a little less than seven percent of the company.
That said, $125 million isn’t chump change, and given Lending Club’s 2013 forecasting profits of $90 million in 2013 (courtesy of Forbes.com), it’s clear that peer-to-peer loans are a new and profitable alternative to the traditional loan process.
So what exactly is peer-to-peer lending, anyway? And perhaps more importantly – can it help your business?
Peer-to-peer lending essentially matches up consumers interested in a loan with investors willing to lend to them. Depending on the FICO score of a loan applicant, they’ll be issued an interest rate for their loan and then potential investors are given the opportunity to gauge whether or not they consider the loan a worthwhile risk. The applicants with the lowest credit scores are dealt the highest interest rates, though these rates are often much lower than what an applicant is already paying – be it on existing credit card debt or some other kind of personal loan – which is why they’re so appealing to everyday consumers.
According to their website, Lending Club allows loan applicants to apply for up to $35,000 for numerous reasons, including credit card refinancing, debt consolidation, car financing and – yes – business costs, among many other categories. Lending Club’s rates start as low as 6.78% APR, and can go as high as 29.99% depending on an applicant’s credit score. (It’s worth noting that Lending Club is far from the only peer-to-peer lending platform online; Prosper is another, smaller option among several. Lending Club just happens to be the biggest to this point.)
So yes, peer-to-peer lending websites can potentially help your small business. But how much so really depends on your credit score, your business and your other, more traditional options.
For instance, if you’ve thought about opening up and exhausting credit card accounts to fund your start-up, a peer-to-peer investment loan might be a nice alternative to that for a number of reasons. First, if your credit score is 720 or above (which Lending Club considers an “excellent” score), you’re likely to get a much lower interest rate than that offered by a small business credit card, which generally start at a 12 percent variable APR and up (as opposed to a rate that starts under 7 percent for a similar borrower via Lending Club). That’s a lot in saved interest depending on the size of your loan.
Next, there’s the “hard inquiry” taken of your credit score. A hard inquiry is taken by a possible lender each time you apply for a loan, and impacts your score in a small but substantial way each time (that is unless you apply for multiple loans or credit cards within in a short amount of time, which alerts credit reporting agencies that you’re “shopping around” for the best deal for you). A scattered credit card application here or there could lead to a multiple point deduction in your score, leading to higher APR’s and a lowered ability to pay down your debt quickly. Peer-to-peer loans take just one hard inquiry of your credit, getting you the money at a considerably lower cost to your credit score.
Finally, one more way a peer-to-peer lending might work as a good alternative for your business is that it gives your company the money it needs all at once. There’s no waiting around for credit line increases, or additional loans or cards to apply for. One loan (assuming it’s under $35,000) and you’re done.