With most traditional sources of business funding currently unavailable as the banks and financial institutions close their wallets, many new small businesses are having to look to new models to raise their start up cash. One such model is peer to peer lending.
Peer to Peer Lending is the latest and most popular borrowing method amongst new startups and it bypasses the need for banks. This particular type of fund lending is also known as social lending. What’s more, even in the current climate you’ll be able to find lots of websites that are able to facilitate peer-to-peer lending. Small businesses and individuals who want money can turn to social lending instead of conventional borrowing practices. However, as with all things, understanding the process as well as the benefits and problems of social lending is critical if you are going to make an informed decision. Since the type of lending is quite new, checking the safety and security of the site should be your first concern.
Advantages of Peer to Peer Lending
The benefits of social lending are similar for both the lender and the borrower. One advantage is that it is a really easy process. It will not involve the lengthy and drawn out process of traditional lending and borrowing practices. There is also rarely any need for a go-between or a banking institution. The best thing about this is that the money wont be going via a third party. Another great advantage of peer to peer is that both lenders and borrowers now have accessibility with countless potential finance partners and investors. This way, it is going to be easy for you to compare rates and to choose a favorable partner to your needs. This helps you set your own terms and interest rates making the exchange extraordinarily constructive.
Disadvantages of Peer to Peer Lending
If there are advantages then there will inevitably be downsides to social lending. Investors and lendors should know that there will be only the barest of legal protections that their money will be given back on time. In case there’s non-payment, lenders should seriously look into what happens and how well protected they are. One way is for lenders to go to a civil court or small claims court but this is a time consuming and expensive process. Another problem is if the loan provider or the borrower is domiciled in another country. Naturally, jurisdiction would be the main problem here. Borrowers are better off in the process when it comes to protections so if you are trying to raise capital all of these worries are not so great. Nevertheless it’s still really important to appraise the small print and contract terms set out in peer to peer lending. There are always some loan providers who may try to hide terms in the small print.
Alex is a financial journalist and freelance blogger. He writes about everything from mortgages to peer-to-peer lending to purchase order funding .