Capital Records
Additional funding sources outside of the banking system
It’s not surprising that the average business person is not aware of the availability of peer loans to finance business growth given the fact that many loan officers are not even familiar with them. Peer lending is essentially the use of private party loans designed to obtain capital for business or real estate investments outside of the traditional banking system.
A peer lender, much like a hard money lender, is usually a private investor with capital to lend. The difference is that a peer lender may lend for both business and real estate investment activities, whereas the term “hard money lender” typically is used to describe only real estate investment loans, i.e. for investment property.
The current credit crunch has made the private investment community an increasingly attractive place to go for loans. As banks are working to tighten lending requirements to fix their balance sheets, profitable businesses with good management and good growth potential are forced to search elsewhere for capital to close deals.
This is where peer lending can be valuable as an alternative source of capital. With peer loans, loan terms are negotiated between private parties without traditional bankers, making for far fewer restrictions in most cases. If a lender is willing to loan the money on any terms negotiated with a borrower, it can be done very easily. Smart private investors will of course ask for supporting documents to verify that a business is legitimate before lending any money.
The private investor considering offering a peer loan benefits because private lending opens opportunities for investment away from the low returns of the current banking system. A peer loan may get 13% interest or even more, depending upon the terms negotiated with the borrower.
This scenario shows a typical situation where a peer loan may be useful. Suppose a small business just received an uncharacteristically large order – larger than any order it’s received in its history. This new order will move it from the regional stage to a national or international stage. Since banks look mostly at the credit history of a company requesting a loan, it may not be able to approve a large new loan for a new area of business growth since no credit history exists for it yet.
In this case, the small business owner may then pursue a peer to peer loan, subject only to getting the approval of a prospective investor. If the business owner has a contract for a large new order, it should be fairly easy to obtain a peer loan to finance increased production to fulfill the order.
The best place to find peer loans is in your private network of friends and extended business associates. Ask around, and you might be surprised to find a wealthy friend at church or in your business circles with money to invest, whether that’s a hard money loan for Omaha real estate or Idaho real estate, or a business loan to fulfill a large manufacturing order.
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