The small business loans are still being sought out by many companies looking for sources of financing to either establish their operations or grow their current company, but there are still some issues that these borrowers face when it comes to getting funds from a traditional bank loan and this has led many to explore alternative borrowing options like peer-to-peer lending networks. Essentially, these lending opportunities allow a borrower to find funds from an individual or another company who will “invest” money into a business in the form of a loan, which will come with an interest rate and required repayment obligations.
While these types of peer-to-peer loans can be similar to traditional bank loans, they may be more easily accessible due to the fact that lenders might be able to shop around for various businesses to whom they may want to lend and borrowers are putting themselves in a position where more potential lenders may be able to find them. However, an article on ClarkHoward.com provides a basic outline of how this process works and states that for any potential borrowers, “You agree to a credit check and to disclose your debt-to-income ratio. Based on that information, your assigned what amounts to a credit risk score.” After this, borrowers are assigned a grade which is related to the amount of potential risk a lender may take on if they offer funds to a particular company.
This is said to be one way that businesses can not only put themselves in a position to find a lender who will offer them an affordable rate, as these borrowers will usually be associated with a particular interest rate they are looking for, but it will guard these lenders against offering a loan at a low rate to accompany who may be a high risk. However, both lenders and borrowers who are participating in these peer-to-peer lending networks will need to be cautious about entering into agreements, as there may be some businesses who are simply not in a position to handle the responsibilities of a loan or there could be borrowers that find themselves victim of a lender who has set the bar too high when it comes to the total costs related to repaying a loan.
Yet, these alternatives are just one option that businesses may have when it comes to finding the financing they need for their company. Options like SBA loans are still being used as new initiatives recently begun to help smaller companies or businesses in underserved areas, and there are some indications that major banks may be willing to offer more borrowing options in the coming months and increase the availability of small business loan options.
However, there are further alternative borrowing opportunities as there has been credit unions and some community banks that can be beneficial for companies in need of financing but have had no success when it comes to a traditional loan. No matter which option a borrower chooses, though, carefully reviewing the details of any loan agreement, the interest rate, and repayment plan must be the first step a business owner takes as no matter if a loan is from a traditional bank or a peer-to-peer lending network, there can be problems that may arise, which could cause financial distress to a business if these precautions are taken.