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Are Peer-to-Peer Loans a Good Small Business Idea?

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By Cynthia Hsu, Esq. on June 21, 2011 6:46 AM

Have you tried to get funding for your small business, only to get met with denials from banks and other big lenders? Peer-to-peer loans, or person-to-person loans, are a new and rapidly growing area where businesses can get some starter funding.

If you've heard of microfinance, the idea behind peer-to-peer loans is fairly similar. A large network of "lenders" come together to help borrowers raise money for various purposes.

Hundreds of lenders can ban together to help raise money. Lenders can put up between $25 to $1,000, reports The Wall Street Journal.

Popular sites for peer-to-peer lending include Prosper Marketplace and Lending Club. While most of the peer-to-peer loans on the site are for lenders who are looking to reduce their credit card debt, there is a growing contingent of small business owners, frustrated with the loan process with banks, who are also turning to the site, reports The Wall Street Journal.

The system works by charging borrowers a fee to be listed on the site, connecting them with a number of lenders. Lenders lend their fees and are paid back with interest.

A peer-to-peer loan could be a good idea for businesses, since most loans are still tight and difficult to get given the current state of the economy. If a bank turns your business down, it might be worthwhile to check out a peer-to-peer lending site. After all, it's an alternative way to get financing. And, there's the potential that you may get offered a better rate than you could get at a big bank.

Of course, there are some real risks for lenders who are looking to get some interest off of their investment. After all, businesses, especially startups, can be prone to failure - and as a result, there is a default rate for the peer-to-peer loans. A new Security and Exchange Commission regulation has made it such that sites cannot issue notes to lenders unless they are registered, reports The Wall Street Journal.

Though, getting your foot in the door of a person-to-person loan or peer-to-peer loan site may prove difficult. Lending Club has turned down 267,196 of 293,936 loan requests (about 90% of applications) because of poor credit scores and other factors, reports The Wall Street Journal.

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