What is a peer loan?
Many seasoned real estate loan officers and mortgage brokers can’t tell you what a peer loan is, so it is not surprising that the average real estate investor doesn’t know about peer lending. Peer loans are essentially private party loans designed to obtain capital for business or real estate investments outside of the traditional banking system.
A peer lender, much like a hard money lender, is typically a private investor with capital to lend. The difference is that a peer lender may lend for both business and real estate investment activities, whereas the term “hard money lender” typically is applied only to real estate investment lenders.
Tougher banking requirements lead to surge in peer lending
With the banking crisis making working capital harder to come by, peer lending has seen a surge in activity in recent months. It is no secret that banks are tightening lending requirements, causing legitimate business with profitable and growing business models to have to look elsewhere for capital to close a deal or make good on an existing deal.
This is where peer to peer lending shines as an alternative funding source. Since the loan arrangements are between private parties, there are fewer lending restrictions and capital requirements. If the investor/lender is willing to do the deal, it can be done quickly and efficiently. The savvy peer to peer lender/investor will of course ask for many supporting documents to verify that a business recipient is who he/she claims to be, and that the business purpose is what is claimed by the borrower.
The benefit to the peer lender is that an alternative avenue for putting capital to work exists outside of the traditional banking system and its meager returns. A typical peer loan might close for a 15% interest rate or more, depending on the perceived relative safety of the loan.
Small business peer loan scenario
A typical scenario that is ideal for a peer to peer loan might be a small business that just got its “breakout” order of the century, putting it on the map. Let’s say this order will move it from being a regional player in manufacturing widgets to a national, or even an international player. In this case, a bank may look at the company’s track record and say that it can’t justify just a large loan. The business has only had a credit line of $250,000 to date, and is now requesting a $1 million line of credit. The bank says no to the deal.
The small business owner may then pursue peer financing, subject only to convincing a prospective investor of the safety of the deal. If the business owner has a signed contract in hand for a large order of widgets, along with some cash in hand from a large buyer of the widgets, it should be relatively easy to get a peer loan to ramp up production and fulfill the order.
Where to find peer loans
The best place to find peer loans is in your private network of friends and extended business associates. Ask around, and you might be surprised to find a wealthy friend at church or in your business circles with money to invest.
