While millions of average Americans are currently trying to pay down their debt and save money, for some people the margin between paying their bills on-time and losing control of their finances is razor thin. For many of these people, the option of getting Loans through traditional lenders has become difficult if not impossible, as banks and lenders make it harder (and costlier) for “risky” borrowers to qualify. Unfortunately, this leaves many people vulnerable to the predatory lending practices of payday lenders and other expensive loan products.
And like those financially challenged individuals who are looking for Personal Loans, small business owners have witnessed their options for borrowing get more and more difficult to find. Whether you’ve been in business for years, or are just starting out, gone are the days when an entrepreneur could take out a line of credit or get a loan with Fair Credit. Nowadays, small business owners must have near-perfect credit and evidence of sufficient profits to get a loan with a decent interest rate through a traditional lender. Unfortunately, concerns about cash flow and credit access often determine how well a small business functions. Findings just released from the quarterly Wells Fargo/Gallup Small Business Index reveal that the number of business owners who anticipate being in a “good financial position” in the next year was only 59%. In other words, more than one-third of small business owners who responded to the poll anticipate lean financial times for the remainder of this year and into the next. Thus, getting access to financing (at reasonable rates) is crucial for millions of small business owners around the country.
Why Microfinance or Peer-to-Peer Lending?
What resources are available for individuals—and small business owners—who need to get a personal loan (or business loan) that allows them to repay over time? For those with Excellent Credit, there’s the option to apply for a loan through a bank, or even apply for a Credit Card to cover your costs. Additionally, many Good Credit personal loans are available at competitive rates for those with near perfect credit, mostly through credit unions. However, finding personal loans with fair credit, and business loans, can be far more daunting. This is where microcredit, and in particular peer-to-peer lending, has filled a niche to meet the needs to millions of Americans seeking personal and business loans.
The idea of microlending and microfinance is not a new concept, but has evolved in recent years, as alternative financing online becomes more popular. The idea of providing loans to people who have been underserved by traditional banking and credit institutions began in the 1970s, when an American-educated Professor at the University of Chittagong (in the country of Bangladesh) named Muhammad Yunus developed a system by which small sums of money could be loaned to the extremely poor residents of the school’s surrounding neighborhoods. Yunus, an economics professor, believed that this type of small-scale face-to-face lending, when spread across large swaths of people, could help those who would never be eligible for a traditional bank loan to become entrepreneurs, pay for schooling, and otherwise invest in themselves and their communities in a way that could bring relative prosperity to many.
Nonprofit Help for Small Business Owners
Yunus’ idea developed into Grameen Bank, founded in 1983 for the specific purpose of providing personal loans to the poor and underserved. Since then, Grameen Bank has become a model for microfinance all over the world, and by 2009 had distributed over $7.6 billion in loans. In 2006 both Yunus and the bank were awarded the Nobel Peace Prize (Grameen remains the only business to have ever won this prize) for their contributions in ending widespread poverty.
In the last 20 years, similar attempts to embrace community empowerment by help struggling business owners receive financing brought about the Community Development Financial Institutions Fund (CDFI Fund). Started in 1994, businesses that apply to become members may apply for and by awarded low interest loans to help support their operating costs and other needs. For small business owners looking for a non-bank lender, it’s important to check your local area for non-profit organizations that may specialize in microfinancing and lending to small businesses within the community. One example is the California Association for Micro Enterprise Opportunity (CAMEO). The advantages of these types of opportunities are that small businesses can often get the financing they need, with reasonable repayment schedules, while paying low-to-moderate interest rates.
The Rise of Personal Loans Online
For those seeking personal loans (whether for a small business or not), you won’t find many nonprofit organizations that will meet your needs, however there are an increasing number of companies providing low interest personal loans online (with a business model similar to that of Grameen). In 2005, Zopa launched in the United Kingdom as the first online peer-to-peer lending company; since then similar organizations have developed around the world. America’s first website devoted to online personal loans, Prosper, was founded in 2006. Prosper links lenders and borrowers, and charges personal loan rates that are based on a proprietary algorithm determining each borrower’s (credit) rating. The site facilitates an online connection between borrowers (who often provide a lot of detail about what they need the money for and how it will be spent) and lenders (who decide how much they’re willing to lend to any particular borrower).
Advantages of Alternative Financing
What are the advantages of microlending sites like these? For starters, people who may find it difficult to get a loan or credit through a traditional bank will find that the lending standards can be more flexible for getting unsecured personal loans online. For many sites, the minimum Credit Score is mid-600s, and your overall Credit Rating (as well as your selected repayment period) will dictate how much interest payments will be, so you know upfront how much the entire loan will cost. For the lenders (Prosper calls these people “Investors”), they stand to make a much higher return on their money than if they tucked it into a high yield Savings Account or other investment option. The disadvantages of these types of loans are that they’re not for people with poor credit, and the loan sizes are generally small (usually less than $30,000).For small business owners this may be a big negative, however for those seeking personal loans who only need a few thousand dollars, peer-to-peer loans can be funded relatively quickly by anywhere from a half-dozen to a hundred investors.
Ultimately, determining which of these options will provide the best opportunity for the financing you need (whether it’s a personal loan or a business loan) depends on the specifics of your situation. While banks may be making it more difficult for average borrowers to receive loans of even small amounts, the alternatives offered by peer-to-peer and microlending organizations and web-companies can help to fill the lending gap. Remember, before seeking any loan it’s important to check your Credit Reports and scores (ideally this should be done several months before you plan to apply for a loan), so that your credit can truly represent who you are and the type of borrower you might be.