Ever since the Great Recession of 2007, many banks have closed their doors on small business loans, as higher costs and more government regulation have made it less profitable for them. Even businesses that are considered to be “financially healthy” are being turned down. This has made it harder for business owners to get the necessary capital to get their company going.
Fortunately, private industry has come up with an alternative solution to this problem. With the introduction of peer-to-peer lending, business owners are able to connect with private lenders and even prospective investors who have the money they need to get started. A San Francisco-based company called LendingClub has earned a reputation by providing this type of service. It allows entrepreneurs to take a small business loan without absorbing the financial risk. To put it simply, they are the proverbial “middle man” that connects borrowers with prospective lenders.
It is a well-known fact that most small businesses will fail in the first five years. The most minor of issues can lead to catastrophic (and often fatal) consequences. As a result, small business owners are less likely to qualify for a loan, as they are considered to be a “higher risk” than most individuals.
Finding Investors for Startups
I have often said that starting a business is a lot like raising a child. It starts off as an idea in someone’s head, and after a great deal of thought it turns into a detailed plan. After months (and perhaps years) of hard work, a business is born. But it doesn’t begin its existence as a multimillion dollar corporation. Startups are usually small, and they rarely bring in a lot of money – at least, not at first.
But we all know that “you have to spend money to make money.” That’s why startups spend a great deal of time and effort to find investors – people who are willing to inject money into their business in exchange for a percentage of the profit. LendingClub allows startup companies to connect with investors, but they will still have to prove themselves before anyone is willing to put money into their business.
The Power of Competition
One fundamental rule of economics is that greater competition can eventually drive prices down. With that in mind, it is possible that a larger pool of small business lenders can help you get a lower interest rate on a loan – that is, if your credit is good enough. Otherwise, you could end up paying more in interest than you would ever pay through a bank.
If you do decide to take out a loan, make sure you make your payments on time. Otherwise, the loan can go into collections, which can not only affect your credit score but can also damage your reputation on LendingClub.
And there might even be a question as to whether or not peer-to-peer lending is available in your state. In fact, you will not be able to use LendingClub or any other company that provides this service if you reside in the following states:
- North Dakota
- Rhode Island
Peer-to-peer lending is illegal in those states. Therefore, people who live there will not be able to use those services.
It is very likely that a startup company will not be able to qualify for a small business loan through LendingClub, so your chances of getting accepted are better if you are a more established company. Either way, it’s important to have a solid business plan with detailed projections of where your business could go in the future. And be sure to compare your options so that you can find the best deal possible.