"The process is simpler because we do not underwrite the business itself, we just underwrite the business owner," Laplanche says. "The business owner can get a loan based on his own financial situation and his own credit history. It's fully automated and it's no different from getting a credit card or getting a personal loan from a bank."
Origination fees are between 2% and 5% of the loan amount.
Annual percentage rates, which includes the loan interest rate and fees, average about 11% for three-year loans and 14% on five-year loans. That compares with an average 15% to 24% at banks, Laplanche notes.
Websites such as Lending Club also become a sort of clearinghouse to borrowers by having someone in the middle saying "this investor is legit."
But borrowers need to understand that risks are involved, since peer lending investors are not subject to the same rigorous guidelines as banks, warns Marilyn Landis, founder of small-business consultancy Better Business Concepts and a board trustee to the National Small Business Administration.
Borrowers need to be extra careful when agreeing to loan terms -- perhaps even bringing in an accountant or counsel to review the terms. Landis also suggests that applicants find out whether they can repay the loan early and, if so, if a cost is involved.
On the other hand, "because they are not regulated, [investors] could be friendly to your industry or friendly to you," Landis says. "You may have a more patient, flexible, more workable mentor that you would not otherwise have."
Good, the owner of the car wash/self-service doggie wash, got his $16,000 loan last year through Lending Club and says he would absolutely use peer lending again.
It took less than seven days from the time he submitted his application to Lending Club to get the funding, Good says. Several potential investors asked questions, with the most wary asking why Good's company didn't have cash on hand to fund the expansion. (Because that cash is also an emergency fund, Good says, and "Nobody wants to drain that emergency fund.")
The diversification has paid off, Good says. He's looking to fully repay the loan at month 20, nearly a year and a half earlier than expected.
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