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June 20, 2019, 1:04 pm

Why Private Lending is Often Better for Start-Ups

by: The Financial Blogger    Category: Social Lending

You have what you believe is a great idea for building a successful business. What you don’t have is enough financing to get your business off the ground. You have some in savings and family and friends are willing to help out too, but you don’t have enough even when all of you pool your resources together. You are going to have to borrow.

The point of this post is to help you understand that, when it comes to start up business loans, private lenders are often the best choice. Yes, there are exceptions to every rule. But for the most part, private lenders are more apt to give start-ups a fair shake. Keep reading to learn why this is so.

Lending Money to Start-Ups

The first thing requiring exploration is what it actually takes to loan money to start-ups. First and foremost, it takes a willingness to assume a high level of risk. By definition, a start-up is a brand-new company without a history behind it. Lenders have to be willing to put their money up with the realisation that they may never get it back.

Commercial banks are simply not set up to operate this way. They have to be rather conservative about all of their loans and investments so as to not jeopardise deposits. Too much risk could lead to complete financial collapse and losses that would be exceedingly difficult to quantify.

Private lenders do not work within the same kinds of constraints. They loan their own money, not money given to them by depositors. Any risk they assume is assumed only on themselves. That makes it easier for them to look at start-ups with less aversion to the risk presented.

What Lenders Look At

Commercial banks have another big problem when it comes to start-up business loans: their lending criteria. They have to be so strict about who they lend to that it is nearly impossible for a new business owner with no history to get appropriate funding. Commercial banks have to look at everything from the business owner’s personal finances to his or her credit history.

Private lenders do things differently. They tend to look at the four following criteria:

  • The Idea – Lenders start by looking at the business owner’s new idea. Is it a revolutionary idea that could disrupt an entire industry? Or is it an idea that plenty of others have tried to capitalise on but still failed miserably with? The idea has to be solid enough to impress lenders.
  • Likelihood of Success – A great idea makes for a good starting point. Lenders next look at whether or not the start-up looks to have a reasonable chance of success. A lender with confidence in long-term success is more likely to make a loan. Any lack of confidence could mean no business financing for the start-up.
  • The People – Next are the people behind the idea. Private lenders are not necessarily looking for PhDs or business owners with prior CEO experience. But they are looking for passionate people who believe in the start-up, its idea, and its mission and vision. They are looking for people who are willing to work as hard as is necessary to succeed.
  • Their Experience – Finally is the experience of the people behind the start-up. Do they have any experience in business? Do they have any experience with the idea they are proposing? Experience certainly isn’t the only thing, but it’s still important in determining whether or not a company is likely to succeed.

A third-party lender that sees only good things in these four categories is less concerned about the risk of lending to a start-up. Less risk aversion means higher chances of approval. From the perspective of company ownership then, convincing a private lender is more about demonstrating what the company is all about.

Combining Financing Resources

Private lenders are usually a better option for start-ups. They tend to have less stringent borrowing requirements and less averse to risk. But know one more thing: sometimes start-up business loans are not enough. There are times when ownership has to combine multiple financing resources to come up with enough funding to keep the business in operation.

Loans from private lenders can be combined with personal resources, loans from family members and friends, and even venture capital. The right mixture of financing resources can supply all the operating capital a start-up needs, and then some.

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June 5, 2017, 1:48 pm

Finding Lending Options Even With Bad Credit

by: The Financial Blogger    Category: Personal Finance,Social Lending

How Bad Do You Need Money?

Have you ever gone to a casino and wasted twenty dollars in five minutes at a slot machine? Better yet, have you ever thrown a hundred-dollar bill down on blackjack and watched that Benjamin disappear into the casino’s coffer? Well, then you know what it’s like to lose money on a long-shot. But it’s worse if you win.

Here is why: when you throw down a large sum of money on something that shouldn’t end up resulting in profit, but does, in the back of your mind is planted a subconscious psychological seed which says these possibilities can be had again. While there is a statistical probability of multiple, high-yield winnings, this probability is low.

What’s more likely is that you’ll win several thousand, go to the tables, and lose more than you won in the very same evening. But all that being said, you know—or have likely heard—that professional gamblers exist. These are individuals who have learned how the system works, and are able to use it to their advantage.

Granted, professional gamblers represent a minority of a minority. Statistically, they’re as rare as a win at a slot machine. But they do exist, and they exist in greater quantities than you might expect.

Is A Loan A Gamble? Sometimes Yes, Sometimes No

When it comes to loans, securing one with bad credit can be somewhat of a gamble. You’re going to face high interest rates. If you’re lucky, those interest rates will be fixed, but this is not always the case. As a matter of fact, you face the prospects of increasing interest rates which compound what you owe even when that’s already been compounded.

This is a downward spiral, and is something which is only really worth pursuing if you truly have a top-tier opportunity on your hands. It is possible to take out a high interest loan that isn’t fixed, and end up coming out ahead on the deal. But it will require that you pay that loan back as soon as humanly possible, and well-within the time limits.

An ideal situation for a bad credit high interest loan without fixed interest is when you’ve got revenue that is just going to be a few days late, but a bill that has to be paid right now. You take out the loan, pay the bill, then pay off the loan when the revenue rolls in a few days later. This way you’re only “on the hook” for a short time.

Still, being able to pay such bills immediately can be the difference between your business remaining successful, and your business going under. It all depends on your personal situation. What makes sense is to secure a sound financial advisor, and have them paint a picture of your monetary situation that you can get your head around.

The Peer-To-Peer Factor

You want to understand your financial situation, not have your financial situation explained to you. If you can get to that point, then you’ll be able to make an informed choice as regards taking a loan or not. To that end, sometimes your best solution is a peer to peer loan.

When you’re looking for peer to peer bank loan reviews, you might try Banking.Loans, where you will find such information and references resources like Peerform which, according to the site, is a: “…peer-to-peer lending site that targets borrowers who don’t have the best credit scores.” Solutions like this can make finances available to you where otherwise they were unobtainable. If obtaining a loan is something financially feasible for your or your business, going the peer-to-peer route can for many individuals be the wisest option.


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May 6, 2009, 5:00 am

Prosper Strikes Banks… I mean Back!

by: The Financial Blogger    Category: Social Lending,Uncategorized

theempirestrikesbackAbout 2 years ago, there was a lot of writing done on community lending or social lending and companies such as Prosper. Funny enough, my MBA Strategy exam was on the impact of social lenders on banks (no wonder I got an awesome grade in this class 😉 ).

Social lending was meant to great success during the economic boom. However, we all wondered how it would go during an economic crisis while people default on their loan. Would they be able to find people that will still lend money to Sexygirl69 so she can start a new hair salon? The truth is that Prosper went pretty quiet for the past 6 months, trying to find a solution to this huge problem: the lack of liquidity in the credit business.

Instead of injecting money into the credit market, banks are taking the money from US and Canadian government to re capitalize them. Banks that survive the credit crunch of 2008, survived what they call an economic shock. While running their economic stress simulation, they all realized that while they were strong enough to get through the first shock, they are not capitalized enough to face another crisis. Therefore, they keep the money for themselves and do not pass it on to the population looking for credit.

So where is Prosper after the credit crisis?

Well it seems that Prosper is coming back from the dead stronger than ever 😉 They actually want to benefit from the credit shrink created by banks. While people don’t have any other places to get credit, chances are that they will turn around and create an online borrower profile and start requesting money through the social lending sites.

The Government of California authorized Prosper to resume its activities and add a whole new feature: Open Market. They will grant loan companies to participate in Prosper’s model and sell loans on the market. I guess they would probably do it the other way around and request money from investors to lend to more people as well. Social lending may come as a great help for banks too!

Through this initiative, Prosper hopes to increase their share of the credit market while providing access to credit to a lot of people in California with their social lending platform. Getting money from banks seem to be quite a challenge these days and Prosper saw the breech in the banks brick wall.

The evolution of this new business model will be quite interesting as the improvement of our economy (a part of it) could result from action of people lending money to others through social lending and restart the wheel of credit. I’m not saying that everybody should borrow money for the sake of the economy, far from it. However, if you need money from a project and banks don’t want to loosen up their wallet, you rather get it elsewhere!

I’ve made a recent search for social lender in Canada and I didn’t find any active one. There is Community Lend and IOU (I Owe You) but both of them are not open yet. I just can’t wait to be able to lend to people ;-).


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July 10, 2007, 1:32 am

More on Social Lending

by: The Financial Blogger    Category: Social Lending

First, a quick note to mention that my article about Realtors in on the 108th Carnival of Personal Finance hosted by Broke-A$$ Student.  I am getting in the habit of participating in this great carnival. Definitely a good way to get in contact with other bloggers!

After the interview I had with David Andreatta from the Globe and Mail and Canadian Capitalist’s post on social lending, I thought I would go a little bit further in my thoughts. Why social lending appears appealing to me as most people think it is almost evil and doesn’t make sense whatsoever. I can appreciate their concerns as lending money to individual can be hard game as all players are not necessarily playing fair. There are golden banking rules to respect in order to be successful. Reading about how banks look at you on this blog can be very useful to change your thinking toward lending mentality.

Why would I bother lending to individuals when I can get 4% on a saving bank account with no risk?

This reasoning is not bad at first. In fact, why bother investing money anywhere when you are 100% sure to get 4% in your pocket right? Most people that will tell they aim 15% return in their portfolio might have started investing two years ago. Or even worst, they might have never reached their goal once and still pretend. On a borrower’s perception, lending money on a social lending website is being done thinking they can earn 10% on their investment. Therefore, the spread before taxes is now 6%. According to Prosper’s rate chart, only AA credit will be able to borrow at less than 10%. Therefore, I think the potential return is there.

Why lend money when I can invest in mutual funds giving me the same expected return?

Although I am not a big fan of diversification within the same financial product, I think that diversifying ways of making money can be very smart. When you lend to individuals, your return will not be correlated too much to the stock markets. Therefore, you create another asset that is independent from your investment. Rental properties incur the same kind of risk than social lending except that it requires much bigger investment. Nonetheless, both assets require that you trust individuals capacity of repayment. The major difference is that your rental property will increase in value; however, you are tied up with a mortgage that can get you in big trouble if you can’t make the payment. I think that your portfolio should be spread among different type of investment products such as mutual funds, rental properties and social lending.

What is the tax implication of social lending income?

This is definitely one of the bad points of social lending. Income earned thought loans are interest by nature. Therefore, the income is added to your taxable revenue and is subject to your marginal tax rate. For most of us, it means that 40% of what you earn will not get in your pockets but in the government’s pocket. Unless there is some taxation rule that I ignore, I don’t think there is any escape to this. Unfortunately, the borrowers can not pay you the Canadian way.

From what I know (as I was not given the chance to try any system yet), social lending can be another great tool to create assets and to produce income over time. As it is the case with regular investments, your performance will be determined by your involvement (effort and time) toward your credit portfolio.

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