When most entrepreneurs think about loan financing for their small business, they think about the two obvious options: traditional bank loans and SBA loans. However, there's a third crucial type of loan that often goes overlooked. Peer-to-peer lending is a novel concept that brings all the benefits of the banking system within arm's reach for many more small businesses.
Peer-to-peer lending is exactly what it sounds like-one person lending money to another. There are several web sites out there that cut through all the red tape of the banking system, allowing more people to receive the small amounts of funding they need. Prosper.com is an excellent example. The website serves as a digital loan marketplace, where multiple lenders offer bids and compete (think eBay) to fund members who need loans. Once acceptable terms are reached, the debtor receives their funding, and Prosper handles all administrative tasks. The creditors' outstanding loan assets can then be traded as securities through the company's marketplace. These features are what make Prosper an excellent option for companies who need small amounts of funding.
Another possible source of small business financing through peer-to-peer lending is LendingClub.com. A similar model is used on this site as well-by introducing more competition on the lender's side, consumers are able to receive lower rates on their loans. Conversely, these websites are also investment opportunities for people who would like to provide financing for others.
These two sites primarily focus on lending to people in the United States. However, they're a part of a larger global trend toward microfinance. Microfinance is the practice of giving very small loans to entrepreneurs who would otherwise be unable to get loans in the traditional banking system. This trend is particularly focused on lending to entrepreneurs in developing nations. Sites such as Kiva.com operate by lending money to small businesses and tradespeople for the purpose of long-term poverty relief. It is funded by individual lenders and offers loans as small as a few hundred dollars.
Today's entrepreneur, whether operating in a developed or developing nation, would be wise to consider this unique form of financing. It removes much of the red tape and middlemen from banking, making it an excellent opportunity to fund a small business.