Five Reasons Lending Club Beats Credit Cards When Funding a Small Business

By The Dough Roller, on January 21, 2009

With the current credit crunch, raising capital to start or expand a small business can be a real challenge. The bitter irony is that while interest rates are at historic lows, access to funding sources has all but dried up. As a result, many small companies have turned to business credit cards. While credit cards may be a reasonable choice to fund ongoing operations, particularly if the cards carry low interest rates or profitable rewards, P2P lending at Lending Club may be the better choice to fund the startup or expansion of a small business. Here’s why.

1. Fixed Interest Rates

Lending Club loans are made at a predetermined, fixed interest rate. Once a loan is funded and issued, the interest rate never changes. Particularly with small businesses, having the certainty of fixed loan payments enables business owners to better plan for the future. In contrast, credit card interest rates are always subject to change. Even “fixed rate” cards can and do increase interest rates when the card issuer determines the credit worthiness of the cardholder has deteriorated. Furthermore, most credit cards charge interest rates that fluctuate with the prime rate. While the prime rate currently is at a historic low, it most certainly will rise, bringing many credit card rates up along with it.

2. Lower Interest Rates

The interest rates charged a borrower at Lending Club generally are very competitive with that of credit cards. Currently, for those with excellent credit, interest rates start at 7.37% on Lending Club. While you can find some low interest credit cards, most credit cards charge rates in the double digits. Of course with both Lending Club and credit cards, the rate you are ultimately charged will depend in part on your credit score. But the efficiencies inherent in peer-to-peer lending, all other things being equal, may result in lower rates at Lending Club.

3. Three Year Term

Currently all loans on Lending Club are for a three year term. For a small business, a three year term is long enough to keep payments reasonable, but short enough to introduce discipline in a company’s financial planning. When a business carries a balance on a credit card, making just the minimum payments can extend the term of the loan out many years. While the lower payments can help initially with cash flow, they can also encourage excessive borrowing. Lending Club’s three year terms strikes a reasonable balance between lower payments and disciplined borrowing.

4. Friends & Family Can Help

One of the great features of peer-to-peer lending is the social aspect. Lending Club originally was launched as an application on Facebook to take advantage friends and family helping one another. When lenders search for loans to fund, they can chose borrowers based on things they share in common (e.g., graduating from the same school). The same is true for a business loan. If friends and family want to help, they can sign up as lenders to fund a portion of your loan.

5. It May Be Your Only Alternative

Everyday the news brings fresh reports of the credit card crisis. This month, for example, Advanta (a small business credit card issuer) announced that credit deteriorated in December. According to an MSN report, Advanta’s shares plummeted 45% after analysts downgraded the company, saying it is unlike to survive. Of course, Advanta is still operating and it is not the only business credit card issuer, but clearly the market is in turmoil and subject to significant fluctuation. As a result, Lending Club may be a good alternative for small business.

Bonus

While the title to this article promised five reasons small businesses should consider Lending Club over credit cards for capital, here’s a bonus reason: SEC Registration. Lending Club currently is the only person to person lending site to register their notes with the SEC. This means, among other things, that investors can buy and sell existing loans. While this does not have a direct impact on borrowers, it should increase liquidity for investors, which in turn typically encourages more investment. The result may very well be faster funding of loans.

This article was featured in the Carnival of Personal Finance at Funny About Money.

Read more about

Get free updates

    via Twitter
    via Facebook
    via RSS or Email

Share this article

• 
• 
• 
• 
• Share

The Dough Roller, or DR, is the writer behinds behind the Dough Roller (a personal finance blog) and Two Wise Acres (a real estate investing blog). DR covers how to make more money, how to manage money smartly, and how to invest money wisely. If you like what you see, be sure to subscribe to The Dough Roller.

All posts by The Dough Roller

Please share your comment:

Comment Rules: Constructive criticism is welcomed. Please use your PERSONAL name or initials and not your business name or URL, as the latter comes off like spam and I'll most likely delete your comment. Have fun and thanks for adding to the conversation! Here's our comment policy and guidelines.

4 blogs that link to this article:

If your trackback does not show in 24 hours, please resend to this trackback URI.

1. Four Pillars Investing
2. Carnival of Personal Finance 190: Buddy, Can You Spare a Dime? « Funny about Money
3. Weekly Personal Finance Links- Will the Stimulus Actually Stimulate the Economy? | Think Your Way to Wealth
4. Small and Home Business Blog Carnival - February 2009 « Small and Home Business Carnival