How to Attract a Peer Lender
Although peer-to-peer lending has been around for several years, it’s becoming a more and more popular option for small business owners. In this year alone, Prosper Marketplace and Lending Club, two of the largest players in the online peer-to-peer lending, facilitated a total of $129.7 million in loans.
Peer-to-peer, or social lending, takes banks out of the equation and allows people to secure loans directly from a wide pool of lenders, with sites like Prosper and Lending Club acting as a mediator.
Most peer-to-peer lending has a relatively low cap on how much you can borrow—Prosper offers up to $25,000, while Lending Club is slightly higher at $35,000.
“I would say we have a filled a vital void in that we are providing credit in a market that has dried up,” says Scott Sanborn, Chief Marketing Officer of Lending Club. “It isn’t that we’re lending to people that banks won’t lend to, it’s just that a lot of banks still aren’t lending.”
But with more entrepreneurs mining the landscape for P2P loans, experts have a few tips on how to make yourself standout.
Is Peer-to-Peer Right for You?
Before you can make yourself attractive to a peer lender, you have to know what you’re getting into.
The peer-to-peer lending landscape has changed a bit since a U.S. Securities and Exchange Commission crackdown. In 2009, regulators halted the lending process on peer-to-peer sites unless they were registered with the SEC. The ban has since been lifted but left more stringent policies in its wake, such as raised credit score requirements and sites having a heavier hand in matching borrowers to lenders.
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"The good news is the process is very fast—you can have your funds in as little as 5 days," Sanborn says. “But the fact that it’s a fast process doesn’t mean it’s easy to get the loan because we’re issuing to the top end of the credit pool.”
Polish Your Personal Credit Score
When seeking a loan through a peer-to-peer site, “what the business owner needs to keep in mind is that we’re underwriting them as an individual, not the business,” Sanborn says.
That being the case, David Gass, Founder of Business Credit Services, points out “peer-to-peer is all based on your personal credit score, so you need to pull your credit report to find out what your score is right now.”
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Since interest rates on peer-to-peer loans are based on your credit score, Beverly Blair Harzog, author and Credit Card Expert for Credit.com, suggests getting quotes first “to get an idea of whether or not you can beat the bank.”
And what if your credit score isn’t up to snuff? Sanborn cites early detection as a starting point to righting your credit history.
Catching a Peer Lender’s Eye
Once you’re approved on a peer-to-peer site, it’s all about “putting yourself in the shoes of the lender,” Gass says. “The first thing I would look for if I were lending is anything that would lower my risk, and that comes down to things like the borrower’s experience—there has to be something that says you’re not just a dreamer.
Gass also advises small business owners to become familiar with copywriting. “You have to create an ad that tells people why they want to invest in you,” he says.
Sanborn suggests providing an overview of what you’re planning on using the money for and how your business is running.
“The description of the business is going to be more of an influencer to attract a fan base,” he says. “The primary focus should be on providing the documentation to support your credit history and standing.”
Harzog agrees with a professional approach that’s concise and transparent.
“Think of it as business plan: Write out what you’re trying to do, and show that you’ve done your research,” she says. “The way you present yourself comes across over the Internet. Be straightforward, none of this ‘my mom thinks I’m the best kind of stuff’—just be credible and honest.”
Sanborn mentions that peer-to-peer sites are also a great platform to formalize loan agreements between a small business owner and their family or friends. “We definitely have seen on the business side people saying, ‘I have investors who’d be willing to fund my business, and I’d rather pay interest to them than a bank but also have some paperwork behind it,” he says.