3 Things Startups Should Know About Using P2P Loans – SmartAsset

3 Things Startups Should Know About Using P2P Loans – SmartAsset

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Starting a new business requires a certain level of commitment. You’ll also need to have access to plenty of money. Startups often have a hard time qualifying for business loans. But peer-to-peer (P2P) lending could be a financing option worth considering if you can’t get funding elsewhere. Here’s what you need to know about using P2P loans to kickstart a business.

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1. You May Have to Apply for a Personal Loan

Getting a personal loan to support a business isn’t the same thing as getting a business loan. That’s something to keep in mind since borrowing limits for personal P2P loans may not be as high as they are for business loans.

Lending Club, for example, lets you borrow up to $40,000 for a personal loan. But the maximum borrowing limit for business loans is $300,000. If you want a business loan, your company needs to be at least two years old and you need to have at least $75,000 in annual sales.

If you can’t qualify for a business loan, you may need to take out more than one personal loan. But by taking on more debt, it may take longer for your business to become profitable.

2. Lenders Will Look at Your Personal Credit History

When you’re trying to get a personal loan through a P2P lender, your odds of being approved hinge solely on your personal credit history. Every P2P lender has its own credit rating system for borrowers. Finding someone who’s willing to loan you money may be difficult if you have bad credit.

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Before you start shopping around for a loan, it’s best to learn about the credit requirements that different P2P lenders have. Then you can check your credit reports and scores to see how you measure up. If your score is lower than you expected it to be, you might want to put off launching your business. The higher your credit score, the more appealing you’ll be to P2P loan investors (and you’ll probably have access to better loan terms).

3. You’ll Be Personally Responsible for What You Borrow

Getting a personal loan to fund your new business will be one challenge. Another will be paying back what you borrow. If your business doesn’t do as well as you’d hoped, that won’t change your responsibility to the P2P lender or the investors who funded your loan.

If you default on the loan, your lender may sue you. And your personal assets could be seized (depending on the way your business is structured). Before you commit to a P2P loan, you’ll need to know exactly what you’ll be risking if things don’t work out.

Related Article: How to Get a Personal Loan

Final Word

As you’re comparing P2P lenders, it’s important to pay attention to interest rates and fees. Compared to banks, peer-to-peer loans often come with higher rates, which increase the cost of borrowing. If you want the best deal on a loan for your new business, it’s best to shop around.

Photo credit: ©iStock.com/alvarez, ©iStock.com/danielfela, ©iStock.com/PeopleImages

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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Source: smartasset.com

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