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 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.
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, 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.
3. Fixed Term Length of 3 or 5 Years
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.
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
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.
Rob Berger is the founder of the popular personal finance website, The Dough Roller, which has been features on U.S. News & World Report, Yahoo! Finance, MSN Money, and The Wall Street Journal.
On my path to be financially free by 25 I think I am going to add this strategy as one of my strategies for making some passive income.
LendingClub does an outstanding service for both investors and borrowers. I have a friend financing their wedding using their service. The debate for doing this at all is quite valid, but they are, and people are willing to help so it’s fantastic!
Thanks for the good information. P2P lending is becoming more popular as banks make it harder for people to get a loan. I’ve been curious about Lending Club for a while, and now I will look into it more deeply.
I have a very small business that could use funds, but I am afraid to use either a CC or Lending Club. I’m going to do it the hard way and build up from scratch. P2P seems to get pretty high rates which could be pretty costly for a business(but then again so do CCs).
Sweet article! I’m a long time lender at LC and have a particular love of the business loans people request. Sure, the loan amounts are small, but a good bootstrapped business can grow into something wonderful if the borrower has passion. If they have passion, lenders have the funds!