With entrepreneurism on the rise more and more small business owners are discovering that social lending is the funding lifeline their new business needs.
Rather than dealing with all the red tape that traditional lenders require for a loan, social lending provides individuals an opportunity to borrow and lend money to each other. This whole process removes boundaries and empowers entrepreneurs from all walks of life to borrow or invest in each other.
While social loans itself is not a new concept it’s fairly new here in the U.S. and only a handful of companies are becoming market leaders. After initial SEC concerns were put to rest social lending companies like Prosper and Lending Club have clearly taken the lead with a combined worth of originated loans exceeding $300 million.
For the first time ever entrepreneurs have the ability to obtain funding for their business ventures through a network of people on the web in a simple step-by-step process.
Applying for a small business loan has never been so easy or readily accessible despite the current economic times. While banks are saying ‘no’ social lenders are saying ‘yes’ and more importantly they are saying yes with a low interest rate!
However, these low rates are not available for just anyone looking for a loan. Companies like Lending Club have a minimum credit score requirement of 660 plus requires a debt-to-income ratio of less than 30 percent.
Prosper has a minimum score requirement of 640 but does not have a debt-to-income ratio requirement like Lending Club.
Entrepreneurs will find these requirements a lot less demanding compared to what banks require for a business loan. Typically you would need to provide profit and loss statements, financials and tax returns.
Another aspect to these social lending sites that provides entrepreneurs the safety net they need is the ease of access to capital when the minimum requirements are met.
Prosper uses a bidding system where entrepreneurs create a profile, share their story and advertise their listing. The loan amount must range from $1,000 to $25k and must include the maximum interest rate they are willing to accept.
Next, lenders decide whether or not to offer a bid during the auction period and the lowest rate has the opportunity to fund the loan.
Within a matter of days a small business loan can be funded which is nearly impossible when going the conventional route for business financing.
Lending Club works a little differently because it matches borrowers with lenders depending on certain matching criteria like geography, work, education and friends.
Entrepreneurs are limited to three year or five year terms and rates are determined by the credit score of the borrower not bids from participating lenders.
Other social lenders like Virgin Money, Lending Karma and Lend Friend take on a different approach by providing small business owners the opportunity to structure formal loans with the people they know.
These P2P lending companies provide web based tools that create loan agreements, calculate payments, track and record payments and generate packaged proposals that can be sent to friends, family or potential lenders in social circles.
As you can see social loans can be the lifeline that small business owners have been searching for. Getting a small business loan has never been so easy, convenient, fast and cost effective.
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About the Author
Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. A web based system for building business credit with no personal guarantee. He is a weekly columnist for Dun & Bradstreet Small Business Solutions, a business credit blogger for All Business & American Express Small Business and author of “Eight Steps to Ultimate Business Credit” and “How to Build Business Credit with No Personal Guarantee.” His articles and blogs have also been featured in Business Week, The Washington Post, The San Francisco Tribune, Scotsman Guide, Alltop, Entrepreneur Connect, and Active Rain.