The New York Daily News recently ran an article about how entrepreneurs are increasingly turning to peer-to-peer lending sites such as Prosper and Lending Club and Raise Capital to get funding for their small businesses.
The article in question highlighted Chris Daily, who operates two small fitness centers in Manhattan. Daly wanted to get funding to better market his business but couldn’t self-fund the effort and was turned down by a bank. Daly was able to get a $2,500 loan on Prosper Marketplace to provide for the funding and says that he’s now in talks with other potential investors to get additional capital.
Although some major news sources have highlighted how small business owners are getting some levels of capital from peer-to-peer lending sites, Prosper and Lending Club likely aren’t going to be significant capital sources for most small businesses. Typically, you’re limited to loans under $25,000 on Prosper and Lending Club, which isn’t enough to start most types of businesses. You also have to start paying back the loan right away, meaning that unless you start generating revenue right away, your initial seed capital will be eaten away month by month as you have to make payments on the loan.
This isn’t to say that small business loans don’t get funded on these sites, but unless you can provide a convincing argument as to how you’re going to be able to pay back the loan on your loan listing, can demonstrate a solid credit rating and can demonstrate that you will be able to pay back the loan if your small business fails, you probably shouldn’t expect to get your loan fully funded.
Raise Capital is a bit of a different animal than Lending Club and Prosper. Instead, they focus on connecting investors with business opportunities. Raise Capital is more of an online community for entrepreneurs to pitch their businesses to potential investors. It should probably be considered as more of an online angel funding forum than a peer-to-peer lending site.
We don’t have much experience with Raise Capital, but we would guess that traditional angel funding forums are probably a better bet than paying $99.00 to pitch to potential investors. You likely won’t have to pay anything to appear in front of a real angel forum and will probably have a more serious group of investors.
We think peer-to-peer lending sites are just as good as any sources of loans for unsecured personal loans, but if you’re looking for large amounts of business capital, these services probably aren’t your deal. If you want to expand your business and need a small amount of capital to bring a very clearly defined path to additional revenue, you might be able to use Lending Club or Prosper to get some funding. If you’re looking for some speculative venture capital, Prosper and Lending Club probably aren’t the funding source you’re looking for.
