Funding a new idea or a new venture is always a challenge, particularly before the idea has become a reality. Sometimes it seems like the typical catch-22. You must have the funding before you can develop the idea, but you must have a developed idea before you can get the funding. If you are faced with this situation and you only need a small amount of money to get started, you should consider peer-to-peer lending as an alternative to traditional funding sources.
What is Peer-to-Peer Lending?
Peer-to-peer lending involves the direct placement of loans from individual lenders to individual borrowers without the use of traditional banking processes. Although traditional banks may be used to meet federal regulatory requirements, individual borrowers may direct requests for loans and individual lenders make lending decisions. Peer-to-peer lending is still small as compared to the traditional banking industry, but the rate of growth has the finance community watching. However, peer-to-peer lending is becoming more popular as borrowers struggle to secure financing. Industry experts project peer-to-peer lending to grow to over $150 billion in the U.S. by 2012.
How Peer-to-Peer Lending Works
Just as conventional commercial loans, borrowers must pay back the principle and interest in monthly payments in the same way banks require, and just like a bank, missed payments lead to penalties. Peer-to-peer lenders report non-payers to credit agencies and send accounts to collection agencies just as banks would. Making a loan requires a bank license so peer-to-peer lenders normally use banks or credit unions as intermediaries.
Rationale for Using Peer-to-Peer Lenders
There are many considerations lenders use when granting credit. Historically an assessment of a loan proposal includes the five “C’s” of credit: character, capital, capacity, collateral, and conditions. Currently most lenders rely heavily on credit scores such as Fair Isaac Corporation’s FICO. These credit scores weight the credit-worthiness of the guarantor(s) so much that the detailed financial statements from the small business have become almost irrelevant. Using these methods, lenders place considerable importance on the financial aspects of the business plan and loan proposal without considering the market, the entrepreneur, or other qualitative issues. In addition, traditional funding sources often require significant amounts of collateral.
So if you are an entrepreneur or inventor without tons of assets to pledge against the loan or without a fully developed idea, then peer-to-peer lending may be for you. If you want to know more about peer-to-peer lending you can go to any peer-to-peer lending site and read information specific to their process. Some of the most popular peer-to-peer lenders include Lending Club, Prosper, and Zopa. If you are working on a new idea or business startup, we would like to know what you think about using peer-to-peer for part of your funding needs.
About the Author:
Calvin Bacon is the Director of Creative Services at Wisepreneur.com. His areas of interest include idea generation and innovation management.
Excellent article Calvin! I did not know this perticular way of funding.
Up to what amount an entrepreneur could hope to borrow by this way? Is there any maximum limit? And how long the operation of fundraising can be completed?
The key here is ‘small amount’.
Traditional banks and small business loans do not fit the bill for innovative companies to get funded. And most innovative companies need to get a prototype done before they can go with Angel Financing.
Your best partner is your customers. So when you bid to do work for a client, set up a system where you earmark a portion of the project money for your innovative idea. But DONT add that on TOP of your bid.