Substantial Disadvantages of Peer to Peer Business Loans

Peer to peer business loans are a significant alternative to consider when you have been turned down for a traditional loan. While this option does provide some benefits, there are also some disadvantages that can hinder those benefits. The information below highlights the disadvantages of a peer to peer loan which can help you decide whether this kind of loan is right for you.

Sought Amount May Not be Provided

Peer to peer loans are classified as private business loans, so the money for the loan comes from several investors or small businesses. If there are not enough individuals interested or willing to invest in your loan, you may not be able to acquire the entire amount that you need.

Not a Regulated Form of Lending

Funds for the peer to peer loan come from both national and international individuals and companies. Although attracting international attention is good, it can also present unique problems. This particular kind of lending is not monitored or regulated by a financial agency. So, this kind of loan is particularly risky because you will not have any knowledge as to the investor's background or financial stability. With that said, be sure you understand exactly how peer-to-peer business loans work. Read all documentation thoroughly before signing your name and check with a lawyer if you have any doubts about the loan.

Higher Interest Rates

Because a peer to peer loan is not provided by a financial institution, there is a good chance you'll see higher interest rates. The private investors or businesses that are providing you the loan will be more inclined to place a higher rate on your loan because they do not have the resources that a financial institution possesses. If you can handle the higher accrual of interest, then this loan will probably be a good option to consider.

Unknown Lenders

The larger of the disadvantages of this kind of loan is the anonymity of the lenders providing the loan. With peer-to-peer business loans, you do not have any knowledge about the investors or their financial situation. With a financial institution, you can look up its financial stability, history, and other helpful information. You are taking more of a risk with unknown investors and should exercise more care before signing any documents.

Losses are Unrecoverable

Since these business loans are not sponsored by the FDIC, you may find that any losses you may suffer are unrecoverable. It is likely that there will not be any kind of language in your loan agreement for losses as this is a burden to your investors. Because any losses that occur will not likely be recoverable, it is wise to be considerably careful when reading the agreement and to seek other financial options.