Get Your Business Funded: Creative Methods for Getting the Money You Need

Pros and Cons

The Harvard Business Review (February 6, 2009) called peer-to-peer lending “one of the breakout ideas of 2009” but again, that was before some of the problems that soon became apparent in this new industry were in fact seen.

On the surface, P2P lending has many things going for it. It offers cash-strapped entrepreneurs a whole new platform for seeking potential investors. It is quick and easy. The benefits to the lender are no less potentially appealing: P2P lending offers competitive rates of return, there are many businesses from which to choose, and lenders can see a tangible result as a consequence of their investment. All in all, these are good.

According to the website Peer-Lend, P2P borrowers “can receive better interest rates, and investors can yield better returns on invested funds.” These P2P sites typically claim that their investment notes offer annualized returns of around 9 or 10 percent. But such returns don't come without risk. The Prosper.com prospectus says, “The Notes (loans) are highly risky and speculative” and “Investing . . . should be considered only by persons who can afford the loss of their entire investment.”

But there are definite and major downsides to this sort of lending that may not be apparent at first blush.

Regulatory and legal issues. Loans and investments are subject to governmental regulation, and properly satisfying such regulations and regulators is not easy. Maybe that is why one of these sites had to shut down for a while, ...