Peer-to-Peer (P2P) lending is a powerful financing tool for startups and small businesses who lack the needed credit standing for a traditional loan. Young investors have increasingly moved toward P2P lending and crowdfunding as the primary source of startup investments. Since millennials currently make up the largest percentage of active investors, if your healthcare startup is going to succeed, it’s vital to understand the ins and outs of P2P lending before seeking out initial investments.
The Benefits of P2P
The P2P loan application process is significantly faster than traditional bank loans. Rather than bogging down borrowers with extensive paperwork, the process is fast and free of lengthy and unnecessary bureaucratic hoops to jump through. This will protect your startup from languishing for months in the initial financing phase. Additionally, P2P loans have broader terms of approval, meaning businesses with poor or no credit history are more likely to find an investor willing to take a risk. P2P offers advantages to investors as well. Because P2P lending uses collective funding, investors needn’t go “all in” on a project, so to speak.
Risk and Interest
While it’s true that P2P lending platforms are more open to borrowers with questionable credit, they do take steps to protect themselves. Just as with banks, this typically comes in the form of greater interest rates. The rate will ultimately depend upon the borrower’s credit score and history. This is done to protect the lender, as borrowers with a poor history are statistically less likely to pay back on the loan.
That said, these platforms may also use their own unique criteria, which can work to your healthcare startup’s advantage if your credit history is less than stellar. Therefore, don’t be afraid to shop around for a platform which determines interest rates in a way that best suits your position as a borrower. Likewise, use the loan as an opportunity to reestablish your startup’s credit history, as this will make securing funding in the future much easier.
Nickle and Dime
It’s obvious that the main incentive for P2P facilitating platforms is to earn a little bit for offering the service. Generally speaking, P2P lending platforms rely on small fees rolled into the overall transaction. Typically these fees are taken from not just the investor, but also you, the borrower. Investor fees range from simple servicing costs to collection fees in the case of delinquent loans. This is meant to reimburse the platform for any costs incurred when attempting to recover on delinquent transactions. Keep these fees in mind when calculating the cost of your P2P lending transaction, small as they may be. Lending platforms are required to disclose these costs, so take the time to read the fine print.
The Hand That Feeds
It’s a simple fact that millennial investors carry out the bulk of their investments online. Just as you’d recruit the majority of your in-house talent from medical professionals with online training, be it through online BSN to MSN programs or similar academic programs, so too will your investors favor these digital marketplaces.
Spend time understanding investor habits and motivations before settling on a loan. Having a working understanding of these platforms can greatly increase the chances of you finding a loan that meets the unique circumstances of your healthcare startup.
Know the Drawbacks
While P2P lending is a powerful tool for generating startup income, it does have a few drawbacks that are worth pointing out. Firstly, many regions don’t currently regulate P2P lending, which serves as both a strength and a weakness. While this opens up loans to startups that would otherwise struggle to obtain financing, it also means borrowers lack the protections that traditional lending would afford. That said, lenders are equally unprotected, meaning that neither party is at a heavier disadvantage legally. Reputation is key, so choose a P2P platform with an established record. Additionally, since P2P lending goes through a platform as in intermediary, it’s often more difficult to form a personal relationship with the lender, which can impact interest rates in cases where the financier feels distant from the project.
A Perfect Fit
P2P lending is an incredible resource for startups and investors alike. Borrowers are less likely to be denied, lenders have more room to establish criteria for determining interest rates, and the overall process is much simpler than going through traditional channels. While it has its drawbacks, a clear understanding of both the strengths and weaknesses of P2P lending will help your healthcare startup find the perfect fit for your project’s vision.
