Credit Implications of Peer-to-Peer Lending

Peer-to-peer lending allows independent financiers to extend small business loans. These loans are typically easier to secure than bank loans, filling a whole in the market for businesses that would not qualify for traditional lending opportunities. There is a common misconception that these loans go under the credit radar. However, peer-to-peer loans are actual legal contracts that do affect your credit score. For this reason, it is important to understand the credit implications that may come with taking a peer-to-peer loan.

Personal Credit Requirements

When you secure a peer-to-peer loan for your business, you are actually taking a personal loan that will be used for your business. The lender will not consider your business plan or financial reports as heavily as he or she will consider your personal assets and credit. If you are approved for the loan, it will go into your name and against your credit identification number or Social Security number. This means the loan will appear to be a personal loan to all other creditors. It can affect your ability to secure other personal loans, including mortgages, and will ultimately threaten your personal assets if you cannot repay the debt on schedule.

Qualifying Based on Personal Credit

Since the lender is extending the loan to you and not your business, your personal credit will be the main factor considered in the application process. Your other debts will be considered against your income, which may be negligible if you are just starting a business. If you have a high personal credit score, you may qualify for better financing in the peer-to-peer industry. This is not necessarily true in the traditional lending environment, where you may not qualify for good terms if your business is not well capitalized. While this is one feature that may attract you to the peer-to-peer option, if your personal credit score drops, your loan could become more expensive.

Missing Payment

When your business misses a payment on a traditional loan, your business will be the one held accountable. The knock in credit goes against the business, and so the business will be contacted by a collection agency if necessary. When you miss a payment on a peer loan, all of the burden of that missed payment falls on your personally. For example, if your business has a slow sales cycle and cannot pay the $500 payment due this month, you will personally be contacted by a collections agency, when necessary, in order to recover the money.

Protection in Default

In a worst case scenario, if your business fails to repay the debt, you will not be protected personally from obligation to pay. When you take a standard business loan in the name of the company, your company can declare bankruptcy if it is unable to meet its payment obligations. The court would dissolve the business and resolve any debts. When you have a peer-to-peer loan, it will not go away in a business bankruptcy. Your personal assets may be threatened by a relentless lender, and you will ultimately have to repay the debt even if the business itself no longer exists. 

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