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Peer-to-Peer Lending 2015

Peer-to-Peer Lending 2015

Financing Alternative for Small Businesses

Imagine that you own a small bakery and you need $15,000 to buy a new oven. There are 15 people across the country, each of whom has $1,000 that they want to invest in a small business.

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The only problem is that the likelihood of meeting all of these 15 investors is fairly low—unless you use an online peer-to-peer (P2P) lending platform. Peer-to-peer lending is a relatively recent development that uses the Internet to connect individual investors with other individuals, such as small business owners, seeking to borrow money. On peer-to-peer lending websites, potential borrowers apply for credit, receive a credit rating, and post to a listing that investors view. Investors can then choose to fund part of the loan, and are repaid peri-odically until the loan matures.

Peer-to-peer lending, which has grown rapidly over the past decade, offers both benefits and downsides to small business owners who are seeking capital. For example, although the credit application process is less burdensome, interest rates can be higher than with traditional bank loans.

This issue brief focuses on the use of P2P loans by small businesses in the United States. Data suggest that peer-to-peer lending may be a viable financing alternative for small businesses, particularly given the post-recession credit market, although financial regulations have an impact on this potential; for example, peer-to-peer lending is only available to investors in certain states due to regulatory restrictions. This issue brief examines data on P2P lending to small businesses, offers an explanation of the peer-to-peer lending industry, compares it to traditional small business financing options, and discusses implications regarding its future.

Additional information

Language

English

Pages

14

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