Peer-to-peer (P2P) lending has swept through the small business financing scene over the past few years, quickly stepping up to loan money where many banks have backed away. While P2P loans offer some great benefits for business owners, traditional bank loans are definitely not falling by the wayside just yet. Here’s how they stack up against each other.
Both banks and peer lending websites like Prosper.com and LendingClub.com offer risk-based interest rates. Simply put, the better your credit the lower your interest rate will be. And it seems that banks tend to win the contest in this realm. A research study from the Federal Reserve Board of Governors found that in 2012 borrowers of small business loans at The Lending Club paid an average rate of 13.4 percent. Those who took out small business bank loans paid an average of just 6.3 percent though, according to the National Federation of Independent Businesses. Of course, when you have poor credit borrowing gets trickier and more expensive in both arenas. Banks have all but stopped making bad credit business loans, so while the interest rate may be high, P2P loans might be the only available form of capital for some companies.
Because they offer loans backed by the government’s Small Business Administration, traditional banks can provide much larger amounts, with a $5 million maximum on a 7(a) loan. Peer loans are dependent on the capital of individual investors and often top out around $35,000.
Qualifying for a P2P loan is usually easier than it is for business bank loans since there is less paperwork involved. Plus no collateral is required unlike with many bank loans.
Both P2P loans and bank loans offer vital capital to small businesses, each with their own unique benefits. The right one for your business depends on the size of your needs and attractiveness of your credit score.