Alternative Funding Sources: Exploring Peer-to-Peer Lending

Business owners are always talking capital – generally lack thereof or how to get it. There are several ways to get capital, none of them necessarily easy and each with their own challenges. Crowdfuning has become an industry favorite for statups as a means of idea justification and quick access to funds. Venture capital seems to fit a niche number of businesses, and with the downturn in the economy a few years ago, traditional banks loans for small businesses dropped significantly.

When the recession hit, two new forms of lending appeared on the radar – merchant cash advance companies and peer-to-peer lenders. Merchant cash advance companies typically offer an up front lump sum of money, and in exchange, control a business’ credit card machine and deduct from each transaction for repayment. It seems like a great option because it provides business owners with instant cash, but in a largely unregulated market, lenders are able to charge astronomically high interest rates.

“In my opinion it was really bad for businesses because if you are desperate for cash and it’s easy to get, a lot of people took it not realizing you will be paying back double and it will eat so much into your profit that you will end up going under anyways,” says Ilya Bodner, CRO of the Shipyard.

On the other hand, peer-to-peer lending offers something more promising.

“Our mission is to make borrowing more affordable and investing more rewarding,” says Tom Green, head of the small business program and one such site,

The website creates on online platform that manages the marketplace between borrowers and investors. Green explains how their platform is able to save money for both parties. First of all, borrowers can get a much lower rate than through other outlets, with interest rates starting at 5.9 percent. They are also charged interest over time.

“What that means is if you take out a two-year loan and pay it off early, you actually save money,” Green notes

For an investor, money sitting in a bank account is probably earning less than 1 percent interest a year. Green says that investing in peer-to-peer lending can instead earn returns in the high single digits.

The website has multiple facets, small business being a new branch that was started in 2014, a deviation from their typical dealings with personal loans. Green says they started the program to the address one of the biggest issues facing business owners today – lack of access to affordable capital.

Small businesses drive about two-thirds of the job creation, but are severely under capitalized. Green says that in 1995, small businesses accounted for 51 percent of commercial loans. Today that percentage is 29, with more loans going to large businesses.

In response, Lending Club offers business loans of up to $300,000 with rates starting at the same 5.9 percent rate as personal loans.

“We think can really make a big difference to a lot of small business owners and their families,” Green says.

So how does it work? After an online application process asking for basic information that any business owner should have access to, the owner receives an immediate “yes” or “no” response.

“One of the things our customers love about us is that instant decision,” Green says. While a “no” might sting, Green points out that just knowing upfront can almost be better. If approved, a business owner will also instantly know all the loan specifics and rates up front. From there, customers can also get their money in as quickly as two days from when they got on the site.

While Lending Club’s personal loans are funded peer-to-peer, the small business program is funded by institutional investors to avoid exposing individuals to the risks of a newer program. The institutional investors are committed to funding the overall program versus individual businesses.

Lending Club provides funds for a large range of businesses, but Green is quick to point out it’s not a crowdfunding site or the best option for brand new startups. Lending Club looks for “real and viable” businesses that have been operational for two plus years. The lending facilitator makes sure that the business has a strong financial background and a good credit history. They are looking for loans that will be a responsible decision while truly helping business owners invest in their long-term growth.

This more established small business is a good match for the type of business Bodner says can benefit from a microloan. Sometimes startups get funding but don’t necessarily know what to do with it or how to spend it efficiently. Loans to more established businesses can be the bump they need to grown – which is exactly the thinking behind Lending Club’s actions.

“Without access to capital, they can’t invest in inventory, in growth, in employing new people,” Green says. He calls small business a driver of economic activity, but there must be affordable access to capital to make that happen.

Do you have any thoughts on alternative funding sources? Email us at [email protected].