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How to Get a Small Business Loan without a Bank

Unless you carry gold-encrusted financial credentials, many banks and credit card companies no longer want you as a credit customer. But that’s okay, since many credit-worthy (as well as credit-challenged) customers are turning to online “peer-to-peer” (P2P, or person-to-person) loan sources, and are proving they no longer need a bank.

Web-based P2P lending is booming.  Consider it the democratization of the lending industry — average Americans making loans to each other in a controlled marketplace made possible by the evolution of several websites created to facilitate P2P lending.

One such site, Prosper.com, has a membership base of over a million individuals, including both those who lend and those who borrow, and has funded over $230 million in loans.  The system works like an auction where credit-worthy borrowers post a loan request or “listing,” and would-be lenders bid for the business. So if you have a good-looking credit history, want to borrow $10,000 and are willing to pay, say, 10 percent interest, you could end up with a loan at a lower rate as lenders compete for your business.

As a borrower, you set the amount of want and the rate you want to pay and wait for lenders to step up.  And it works. Much like eBay spawned an army of small e-Bay businesses, P2P sites are attracting small investors who see it as a way to earn a higher return on their money. 

P2P sites have created a turnkey structure to facilitate the loan process. In addition to matching peer borrowers with peer lenders, the process provides all of the loan documents and payment systems to make the loan happen.

In addition to criteria commonly used by banks, such as credit scores and histories, Prosper lenders, for example, can consider borrowers’ personal stories, endorsements from friends and group affiliations. Once the auction ends, Prosper takes the bids with the lowest rates and combines them to facilitate the funding of one simple loan to the borrower, and then issues what are called “Notes” to all the winning bidders. Prosper handles all on-going loan administration tasks including loan repayment and collections on behalf of the matched borrowers and investors. Prosper members can also trade Notes with other members on the Folio Investing Note Trader platform. 

Another leading P2P site is LendingClub.com, which works similarly to Prosper.com. RaiseCapital.com specifically targets small business loans and connecting entrepreneurs to potential investors.    

Beware of “me-to” sites that attempt to jump on the P2P bandwagon but might not have the member base or resources to stay in business. A site called Pertuity Direct, for example, came and went quickly as its investors pulled the plug. Because P2P lending sites have to meet state government lending rules (as well as federal SEC requirements), they aren’t operating in all 50 states. Check their web sites for a list of areas they operate.

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

Beware New Small Business Credit Score System

Without warning, millions of small business owners seeking loans or other credit from banks, vendors, corporations, finance companies and trade creditors will now be subjected to a new automated business credit scoring system that aims to reduce lender risk and eliminate manual reviews of small business loan applications.  The new small business credit scoring system was developed by Equifax, a large global credit scoring company that has credit information on over 25 million small businesses.

In a nutshell, the new system takes more small business credit decisions out of human hands and turns them over to computers armed with vast quantities of data never before used for this purpose.  The new business risk assessment scores allow banks and other businesses to go well beyond traditional industry reports when deciding whether to approve a small business loan or not.    

BizBest inquiries have found that banks and other lenders aren’t satisfied with how small business credit scores are currently compiled and have been quietly working  with Equifax to develop a new, automated “early warning” scoring method that uses more data on each small business and new techniques to “predict” future changes of default.  Small business lenders themselves, through an industry association they’ve created called the Small Business Financial Exchange, are supplying new types of data that hasn’t been part of past scoring efforts.

According to Equifax documents, the new small business credit risk scores differ in four key ways from prior scoring systems:

  1. The new approach uses several different automated scoring systems that are built on pre-recession, recession and post-recession data. They represent a new type of business scoring that provides a more complete view of how a company meets its credit obligations during changing economic conditions.
  2. The new scoring system incorporates twice as many data attributes as other industry scores, including large and small business, public and private organization and time series variables.
  3. A new minimum scoring standard and threshold will be used to validate the legitimacy of a small business and verify information supplied on the credit application errors, omissions or inconsistencies.
  4. The new small business credit “scorecards” will be applied automatically based on business size. This is basically meant to encourage banks, lenders and other creditors to skip using other scoring systems and stick with this one alone. 

This is not an experiment, trial or proposal. The new scoring methods are already in play. Specifically, Equifax is providing the following to lenders:

  • The Business Delinquency Score, which predicts the likelihood of severe delinquency on an account, and;
  • The Business Delinquency Financial Score, which determines the likelihood of severe delinquency on financial accounts.
  • A next-generation Business Failure Score, which incorporates many of the same data elements as the delinquency scores – enhancing its ability to predict the likelihood of business failure within the next 12 months.

And here’s something else business owners should know:  Both of these new credit scoring products give lenders the additional choice of obtaining credit information on the business owner and other officers and principals, along with credit information on the business itself.  Equifax says it plans to introduce other scoring changes and enhancements throughout the year.

The inability of banks and other lenders to anticipate how a small business might fare under changing economic conditions in the future has been a driving force behind the new scoring system.  Burned by defaults in the “Great Recession,” creditors are seeking a new crystal ball to help them tag businesses that – although faring well now – might stumble if marketing conditions change.

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.