If you believe the hype and get pulled in by the slick marketing material, peer-to-peer lending is nothing short of a working capital commercial loan miracle.
Indeed, at first glance the story is quite compelling. Find a peer-to-peer platform, create a profile, make a pitch, and voila: within days (if not hours), you have a virtual line of lenders who are eager to fork over their cash. What could go wrong? Well, in a word: everything.
That is, instead of solving your working capital commercial loan needs, your foray into the peer-to-peer lending marketplace could be a risky, costly, time consuming and very frustrating experience.
And while we aren’t about to suggest that your experience will definitely be negative – because it might not be – at the very least, you should be aware from the outset of why peer-to-peer lending may NOT be your best working capital loan option. Below, we highlight the 3 key reasons:
You Might Not Reach Your Target
Ask almost anyone who has tried to raise funds via Kickstarter, Indogogo or any other crowdfunding website, and they’ll tell you that it’s not as easy as it looks! Indeed, for every success story, there are thousands of attempts that failed to reach their target. Many barely got off the ground.
Peer-to-peer lending platforms follow the same pattern: a small percentage of businesses achieve their goal, but the vast majority don’t. This is often less about the viability of these businesses, and more a function of two things: massive (and growing) competition as businesses flock to the peer-to-peer space in search of funds, and the fact that many lenders are looking to invest small amounts – which usually means that hundreds of them are required simply to fund one business.
So while it’s possible that you’ll reach your goal, if you have a time sensitive expense to cover or investment to make, you may find that peer-to-peer is not a suitable or even a safe working capital commercial loan option.
No Relationship with Lenders
With peer-to-peer lending, you have no idea who is interested in contributing to your business. What is their history and experience? What is their financial situation? What happens if they don’t follow-through on their commitment? Or what happens if they want you change your business direction or strategy so they can “get their money back”?
This isn’t to say that everyone who lends in the peer-to-peer marketplace is somehow illegitimate or a problem waiting to happen. Obviously that’s not the case. But there are added risks here vs. choosing a working capital commercial loan partner that you can research and speak with. As long as you’re willing to accept these risks, then you may be OK to move ahead. But if you have any doubts, now is the time to listen to your gut – not later, after the documents have been signed and you’ve essentially accepted a legion of “anonymous” stakeholders in your business.
No Bandwidth for Change
Things can happen from time to time that require a conversation with your lender. For example, you may want to take out a second loan because instead of expanding to 1 new location, you have a golden opportunity to expand to 3 new locations. Or perhaps a major supplier has offered you the opportunity to save 30% on a PO if you triple your order for the next 2 quarters.
Or maybe things go in the other direction, and you have more cash than you need. And so instead of having “dead money” sitting (or rather, dying) in your account, you want to reduce or maybe even fully pay back your working capital commercial loan ahead of time.
If your loan is sourced in the peer-to-peer marketplace, then the above are NOT open for discussion. Borrowers who ask for additional funds – even for perfectly legitimate and, in fact, clearly profitable reasons – are red flagged immediately. And paying a loan back early is something that lenders will accept – but only if they get FULL interest. They don’t care that you’re in a better capital position than you thought you’d be. They made an investment and want their ROI.
The Bottom Line
Though it may seem otherwise, be assured that at Mulligan Funding we aren’t against peer-to-peer lending. On the contrary, we support any safe and legitimate way for small businesses to grow and succeed!
However, we do think it’s necessary for potential borrowers to be aware of the factors and risks – which, unfortunately, are not usually clearly described (or conveyed at all) in marketing material. Now that you have some basic information, you can move forward safely and make a decision that’s right for you.
Call Mulligan Funding at 855-326-3564 to discuss your financing options today!