Dollars and Sense

Another way to borrow

Since the dawn of commerce, people have turned to friends and family to borrow money to start or expand a business. Sam Walton, Tommy Hilfiger, Frank Sinatra and other successful entrepreneurs have used peer-to-peer lending.

Of course, there are drawbacks – hence the old guideline of “Never do business with friends.” Payback may take longer than you expected. Even though the lenders are family and friends, they may become unhappy with late payments.

Another problem is that when people have loaned you money, they often feel they have a stake in the business. They may press you for personal and financial information you are reluctant to share. They may come up with ideas about how you should run your business that, no matter how well intentioned, are not in sync with your plan.

However, peer-to-peer lending avoids this interference. It has evolved to an Internet-based system that uses technology similar to eBay to match parties seamlessly and anonymously. Lenders online decide whether to lend money – and at what rate – based on the borrower’s credit score, existing debt and other factors. Typical loans range from $8,000 to $20,000. On some sites, multiple lenders may fund a loan, each offering amounts as low as $25.

The more established players, such as Prosper and CircleLending, which rebranded itself Virgin Money USA this year, dominate the business. Other rivals are entering the industry at a time when even people with good credit are finding it harder and costlier to borrow from traditional sources. 

Prosper has enabled 25,000 loans among its 750,000 members that averaged $6,000 each. The U.K. site Zopa, usually considered the granddaddy of P2P lending online, reports its lenders were averaging 7.3 percent returns – better than twice the rate of a typical bank account. Most impressively, perhaps, Zopa says the default rate of its members’ loans is an ultra-low 0.02 percent.

Being a lender on one of these services is not for the beginner. Take your time and learn as much as you can about credit scores and rates of return. These loans carry risk and there is no collateral posted.

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On the other hand, if you are looking for a loan to start under your own authority or to expand your business, this can be a great alternative to bank loans, credit cards and lines of credit. P2P services, which generally have negligible fees, can be an alternative to the high fees and interest rates of factoring freight bills to help with cash flow. Since many sites offer loans up to $25,000, it can be a great way to buy a low-end used truck or help bolster a down payment on a higher-end truck.

Borrowers pay an interest rate based on their credit score. Because of the bidding process, you can expect to pay two to five percentage points less than a typical bank loan.

Do your homework and seek the advice of a financial professional before engaging in P2P borrowing or lending. An Internet search for “peer to peer lending” will yield plenty of information. n

How peer-to-peer lending works

• A borrower applies online for a loan.

• Registered lenders, who have access to the borrower’s credit information, can view the purpose   of the loan and others bidding on the loan.

• Interested lenders bid on the loan.

• If the loan gets enough bids, funds are placed in the borrower’s bank account.

• Payments are automatically deducted from the borrower’s account.

Kevin Rutherford is an accountant, small-fleet owner and the host of “ATBS Trucking Business & Beyond,” which airs on Sirius XM Radio’s Road Dog Trucking Radio. Contact Rutherford through his website,