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.
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 creditworthiness 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.
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, where borrowers with good credit scores generally enjoy lower interest rates. But the efficiencies inherent in peer-to-peer lending, all other things being equal, may result in lower rates at Lending Club.
Currently all loans on Lending Club are either for a 3-year or a 5-year term. For a small business, these terms are 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 terms strike a reasonable balance between lower payments and disciplined borrowing.
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.
Although the credit is fgetting easier to obtain, it is still not that easy. Some banks are easing up on their lending requirment, but borrowing from these institutions may not be the most cost effective option for your business. As a result, Lending Club may be a good alternative for small business.
Lastly, check out WealthPilgrim.com for a comprehensive review of Lending Club.