Peer-to-peer lending, which is widely known as P2P lending, is a system that allows a person to obtain loans directly from another individual. The main difference between traditional loans that you process through the bank and P2P lending is that the presence of a financial institution as a middleman is cut off.
There are a number of websites and online platforms that facilitate these P2P lending transactions. Over the years, this process of lending between peers has become an accepted alternative method of financing.
P2P lending is also referred to by many as crowdlending or social lending. This activity has been around since 2005. Today, there are numerous online P2P lending platforms that it can get quite daunting if you are new to all of these.
With that in mind, this article aims to guide you through one of the many aspects of P2P lending. Today, we will talk about the different types of lenders. Whether you are a borrower or a lender yourself, it is important to familiarize yourself with these concepts as it can greatly contribute to the overall success of your P2P lending experience.
Nevertheless, let us start by identifying what a lender is.
What is a Lender?
We all know that lending, which is sometimes referred to as financing, is the act of temporarily giving money or property to another person with the expectation of repayment. In the context of business and finance, lending or financing involves various types of commercial loans. Nevertheless, do note that lending and borrowing pertain to the same transaction from two different viewpoints.
A lender is either a business or a financial institution that lends money, with the expectation that it will be paid back. The borrower is expected to pay interest on top of the actual loan as a cost of the loan. Interest rates are determined by the level of risk of not being paid back. With that in mind, the higher the interest rate, the higher its risk of not being paid back.
The level of risk differs when it comes to various lending transactions. Lending money or property to a startup business is considered as risky, which is why it is uncommon for lenders to lend small business loans or charge low-interest rates for startup business owners.
Why Do Lenders Exist?
Stemming from the previous point, if you are an entrepreneur, you will understand that its quite difficult to get a loan approved for your business startup. It has been determined by the lending industry that new businesses are considered one of the riskiest loans that either a bank or a lender may encounter.
Nevertheless, there are still a number of lenders that will agree to lend you money provided that the interest rates will be very high. If you are in a situation where you need money for your startup business, P2P lending is an option for you. With that in mind, it is crucial that you understand how everything works, including the different types of lenders.
What are Different Types of Lenders?
- Peer-to-peer lenders
As explained, peer-to-peer lending happens when individuals borrow from other individuals without using a credit union or without having the transaction go through a bank. One of the most common P2P lending platforms is Fundko. Here, you can evaluate P2P lenders as you shop around.
With P2P lenders, the rates are relatively low considering the fact that there are no overhead costs. Furthermore, if you are going to get yourself involved with P2P borrowing, you have to have a good credit score.
You can use various P2P lending platforms to compare rates. Furthermore, pay attention to promotional rates. Nevertheless, with P2P lending, you no longer have to go through the same process steps as that of traditional lending considering the fact that P2P lending features a very straightforward application process.
Crowdfunding is often referred to by the lending industry as online financing. This is a new way for both individuals and businesses to fund projects through the power of the Internet. The goods news is that crowdfunding has been used for so many years now, especially by the entertainment industry.
The way crowdfunding works is that websites or any type of online platform would allow either companies or individuals to present an idea to others, who will then donate money with no expectations in return.
Kickstarter is considered as one of the largest crowdfunding sites today. It functions as a middleman between the individuals who are to present their creative projects to others, who will give small amounts of money as a form of donation.
- Financial assistance from friends and family
There are a number of organizations that assist in sorting out tricky financial and personal issues involved with certain types of lending transactions between family and friends. If you are to acquire a loan from someone you know, it is best to have the loan agreement in writing. These agreements are referred to as private party loans.
- Borrowing money from your own savings
Most people fail to realize that they can borrow money from themselves. You can loan money to your business from your own savings account. This can function as an alternative to investing in it. You are somewhat considered as the lender and the borrower at the same time.
Again, its best to have the loan agreement in writing. The contract will dictate your role as a lender as well as the decisions made concerning regular payments and consequences should there be an instance that the business would default.
What are the Factors To Consider When Choosing a Lender For a Business Loan?
Now that you are equipped with the basic knowledge of the different types of lenders that you may encounter during a credit transaction, it is time to proceed to the factors affecting your decision.
- Amount of loan
- Assets pledged
- Type of assets
- Startup or expansion
- Term of the loan
When you shop for a loan online, there are a number of factors to be considered. The factors mentioned above will determine which type of lender is the perfect one to finance your loan.
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