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Starting a Peer to Peer Lending Business – A Complete Guide

Do you want to start a peer to peer lending business from home? If YES, here is a complete guide to starting a P2P business with NO money and no experience.

Okay, so we have provided you an in-depth sample peer to peer lending business plan template. We also took it further by analyzing and drafting a sample P2P lending program marketing plan backed up by actionable guerrilla marketing ideas for peer to peer lending businesses. In this article, we will be considering all the requirements for starting a P2P business. So put on your entrepreneurial hat and let’s proceed.

Why Start a Peer to Peer Lending Business?

The peer to peer lending business is a very interesting one and this business came on board as a result of economic downturns that forced banks to become reluctant in lending money to high risk individuals. Peer to peer lending business allows people to who are looking for loans to either start a new business or to pay off high interest on their credit cards, to be funded by other individuals instead of banks.

Most peer to peer lenders usually operate in marketplaces. Even though starting a peer to peer lending business might look easy, it is however a serious business that is plagued by a high risk as well as heavy regulations. This is especially one of the reasons why adequate research has to be done.

It is imperative that you hire an attorney that will help you navigate the complex securities and banking regulations that surround the peer to peer lending business, and also help in drafting a comprehensive loan agreement. Asides attorneys, you would need to work with professionals in the finance and consumer credit sector that will help in generating policies and procedures that will not only be up-to-date but also comply with the regulations – such as Fair Credit Reporting Act, Electronic Fund Transfer Act, Equal Credit Opportunity Act, Truth in Lending Act, and the Bank Secrecy Act – in the sector.

Starting a Peer to Peer Lending Business – A Complete Guide

  • Industry Overview

The growth of the internet has seen the increase of peer to peer lending businesses not only in the United States but also globally as well. Also, technological innovations has seen peer to peer lending businesses offer quick updates with users also having a smoother access to interfaces.

  • Interesting Statistics About the Peer to Peer Lending Business

According to the report by Transparency Market Research, as at 2015, the peer to peer lending market was valued at $26.16 billion globally. It has been predicted that by 2024, the valuation for this sector will rise to $897.85 billion, with a significant CAGR that will expand to 48.2%.

Asides technological innovations which encourage existing players as well as potential customers to make quick decisions, the growth in this sector can also be attributed to the low operational costs. Also, since more students prefer to take loans from peer to peer lending businesses than traditional lending institutions due to their cheaper interest rates, this has also propelled the sector to enormous growth. This does not however mean that it has been all good for this industry, as default payments is threatening to have a serious impact on the growth of this sector.

Due to the ease of access for funds from peer to peer lending businesses, small businesses owners, and startups now prefer to get funds especially as there is absence of strict regulatory framework and complicated compliance structure.

Globally as at 2015, the peer to peer lending market was dominated by North America with over 43% share. The Asian Pacific with emerging economies like China, Japan, and India has also tapped into this market making a significant impact with Australia following closely behind. The market is highly concentrated with few top players taking large share revenue of the market.

In the Unites States alone, peer to peer lending has doubled every year since 2010, according to a report by Morgan Stanley to $12 billion by 2014. Factors such as low operating costs, large availability of data, minimal regulations as well as technology has helped in propelling this business seriously. It has also been predicted that this is a fast growing financial model that could upstage the normal traditional banking industry, as institutional investors have also joined this market.

One sector that the peer to peer lending has focused on is unsecured consumer credit, as about 80% of loans are used to consolidate small business loans and debt. However, even though there is ease of entry with little or no capital requirements, and lower operating expenses, which invariably leads to low interest rates for borrowers, peer to peer businesses still do not have it all as they are faced with a tough regulatory environment. Also, even though this business was birthed during the great recession, it really hasn’t faced an economic downturn to really determine how it would fare.

Globally, other countries seem to have the same issues such as the United States. In China for instance, peer to peer lending businesses can operate both online and offline. The sector is highly fragmented as there are more than 1500 such businesses in existence. However, unlike the United States, China’s peer to peer lending businesses aren’t recognized as regular financial institutions neither do they have any access to the nation’s credit reference database.

Another interesting market is the United Kingdom, whose market share dominates about 80% of the whole Europe. Most of their practices are similar to that of the United States; however, while the peer to peer lending businesses in the United States have more of students as customers, that of the United Kingdom are much older.

Starting a Peer to Peer Lending Business – Market Feasibility and Research

  • Demographics and Psychographics

The demographic and psychographic composition of those who require the services of peer to peer lending businesses include:

  • Students
  •  Entrepreneurs
  •  small businesses
  •  Start-ups and other high risk individuals.

Others include older folks and other kind of people who do not want to approach the traditional banking institution but instead seek for a faster and more efficient means of acquiring a loan.

List of Niche Ideas Within the Peer To Peer Lending Industry

There really are no niches within the peer to peer lending business industry as the aim of this business is to ensure borrowers that have passed the screening get the required amount they are looking for from available lenders easily and more efficiently than they would at a traditional banking institution. However, some of these businesses still strive to specialize in certain kind of services such as;

  • Student loans
  • Startup loans
  • Personal loans
  • Business loans
  • Car loans
  • Mortgages
  • Commercial lending loan
  • Bad debt loan
  • Medical loans
  • Micro loan

Specializing in more than one field requires more finances for the lending business as well as more available creditors willing to part with their cash. This is easy enough for big peer to peer lending businesses while small scale businesses focus on just one or two areas of specialization.

The Level of Competition in the Peer To Peer Lending Industry

While starting a peer to peer lending business is not difficult especially as most of the businesses are almost always online; however stringent regulations are also what keep the industry sane. When it comes to the equipment needed to start this business, it is something that is within the reach of any serious minded entrepreneur; however as this is a complicated business that requires knowing about certain laws; you need to be very careful and have backups in place especially as things can go awry.

There are also different areas of specialization in this industry and as an entrepreneur; you would need to decide on which services you want to focus on. While larger peer to peer lending businesses and other well established businesses might have the choice in offering many of the services, smaller companies usually do not have that luxury and instead choose one or two areas of specialization to focus on.

List Of Well – Known Brands in the P2P Industry

Every industry and sector has brands that are well known which is due to the fact that they probably are good at what they do, or have deployed better strategies that have brought them to the fore. Some of the well known peer to peer lending businesses in the United States of America are as follows;

  • CircleBack Lending, Inc,
  • Prosper Marketplace, Inc.
  • LendingClub Corporation
  • Funding Circle Limited
  • Social Finance, Inc.
  • Upstart Network, Inc.

Economic Analysis

Before starting this kind of business, you should understand what the business is about. Peer to peer lending is a process where there are lenders and borrowers in existence but where the regulations are unlike that of a traditional banking institution.

Most of the activities usually take place online and most times you do not have to physically approach a creditor as a debtor as there are processes in place to ensure that you can borrow money at cheaper rates than you would get at the bank, as well as good rates for the lenders than they would usually get at the bank.

However, while this might seem like a stress free business, it typically has higher risks than a traditional banking especially as there is no FDIC insurance covering lenders. Also, as financing is very important, you might need to set your limit of what you are likely to lend out.

Asides, getting investors for your peer to peer lending platform, there are other necessities to consider such as getting an attorney that will guide you through the intricate start-up process, and also help in drafting documents that will protect you from any liability.

Also, another thing to consider is the software for use and this is very important as the software determines how smoothly your business would run. Most entrepreneurs prefer to use already existing software, while others like to build their own software from the scratch; you will need to determine exactly what will be most suitable for your business needs.

Is the P2P Business Worth Starting from Scratch or is Buying a Franchise Better?

An important business decision is on what level to start your business, from scratch or buying of a franchise. As an entrepreneur before choosing any option, it has to align with the vision and objective of your business and what you intend to accomplish.

Buying a business franchise is okay for entrepreneurs who do not want to be bogged down by paperwork that will result from all the regulatory agencies as well as drafting of contracts. Buying a franchise allows you to just concentrate on how best to be efficient in serving your clients. Ensure that you carry out a thorough research before buying a franchise so as not to get your fingers burnt.

Starting your business from the scratch is for people who love challenges and who wouldn’t mind drafting strategies that would propel their business to success. These are people who want to firmly be in control of their business so as they can be able to change strategies anytime they want without having to seek permission from anyone.

Possible Threats and Challenges You Will Face When Starting a Peer to Peer Lending Business

The peer to peer lending business came up due to the great recession that occurred and which led to banks reducing who they lent money to while also increasing their rates. While the lending business has not really encountered great challenges yet, however, challenges still occur in areas such as use of obsolete software, inability to keep up with changing technologies, and also entrants of competitors.

As with any business, you would need to be prepared for any challenges that might crop up and look to see how you can overcome them so that they do not cause your business to fail.

Starting a Peer to Peer Lending Business – Legal Matter

  • Best legal entity to use for a Peer to Peer Lending business

The decision of choosing a legal structure for your peer tot peer lending business is very important because this is a high risk business and you will need to choose a structure that will not leave you personally open to risk from creditors.

Most entrepreneurs who have gone into this business have either chosen a corporation or a Limited Liability Company (LLC) because of the advantages these two legal structures offer. However, your decision on which legal entity to use will depend on factors such as the size of your team and what advantages will suit your type of peer to peer lending business.

If you decide to choose a Corporation, then you must be ready for more paperwork as it requires that you keep records and also report requirements. Also, a corporation would require that a certain number of shareholders meetings be met each year. Also, when registering a corporation, your business name will appear differently.

A Limited Liability Company has a different tax status from that of a Corporation even though as an entrepreneur you can choose for your LLC to be taxed as that of a Corporation. However, what tax method you decide to use will depend entirely on the requirements of your own peer to peer lending business. An attorney whom you will need to work with will give you the proper guidance on which legal structure will best suit your business.

Catchy Business Name ideas Suitable for a Peer to Peer Lending Business

Every business ought to have a catchy business name to thrive successfully. This is not to say that folks with not too attractive names haven’t done well in the past. However it pays to dot all ‘I’s and cross all Ts as you make a launch into the industry.

  • GreenBack Lending, Inc
  • Guarantee Lenders Corporation
  • Beyond Limit Lenders
  • Snappy Lending, Inc
  • Chink Lenders

The Best Insurance Needed for a Peer to Peer Lending Business

Insurance is very important if you intend running a risky business venture such as a peer to peer lending business. The basic insurance policies help protect you from being personally liable for any incident that might occur during the course of running your business.

It is important that you know what insurance policies you will need and this can be achieved by either checking out what policies your competitors are using or approaching an insurance broker to help guide you on the best policies for your peer to peer lending business.

Some of the basic insurance policies that you would need to consider purchasing if you intend starting your own peer to peer lending business in the United States of America include:

  • General Liability Insurance
  • Professional Liability Insurance
  • Workers’ Compensation Insurance
  • Business Owner Policy
  • Auto Insurance

Does a P2P Business Need Intellectual Property Protection?

If you are looking to start a peer to peer lending business in the United States of America, then you need not be bothered about acquiring an intellectual property protection. Those who acquire intellectual property protection in this sector are those who do so for their company name or logo. It is however not considered a priority by most entrepreneurs and so you can choose not to bother about applying for an intellectual property protection.

Is Professional Certification Needed to Start a P2P Business?

If you are looking to start a peer to peer lending business in the United States of America, then you need not worry about getting a professional certification because it isn’t necessary.

It might be necessary however for you to employ professionals in their field who have certifications so that they will help guide you through the intricate part of running the business and also offer tips and advice that will help in moving the business forward. Asides, professional certification, this sector is a heavily regulated one and so there might be stringent conditions that would need to be met.

List of Legal Documents You Need to Run a Peer to Peer Lending Business

Legal documents are needed by every business that intends to run legally and successfully in the United States of America. Some of the documents you would require to run your peer to peer lending business include;

  • Certificate of Incorporation
  • Business Plan
  • Business License
  • Operating Agreement
  • Loan Documents
  • Insurance Policy
  • Non Disclosure Agreement

Writing a Business Plan for Your Peer to Peer Lending Business

Having a business plan is very vital for any serious business man because not only does it show the direction your business is leaning to, it also shows that you have given the business some serious thought by carrying out the necessary research that you should.

A business plan is like a map and requires careful thought so that all the parts would come together and show meaning to the owner, stakeholder and investor. Writing a business plan is not a trivial affair and must show hard facts of what you intend to achieve and how it will be done.

Writing a business plan is not easy and can intimidate those without business acumen or who are bogged down by other aspects of the business. These categories of people usually hire out the task to professional business plan writers who have experience in the field of business they intend to go into.

Not all business plans have to be comprehensively written as some could just be simple enough. However, all business plans must contain basic components so as to be taken seriously. The basic components should be;

Executive summary, which would give a summary of the whole business plan and provide details such as what the company is about, what stands it apart from other competitors, what services the business intends to offer, and what the start-up capital is.

Other components include, marketing and sales goals as well as strategies intended to achieve these goals, how clients will be attracted and retained, and what plans or milestone the business has for certain particular periods. Lastly, your business plan should contain market analysis, SWOT analysis as well as pricing strategy, and financial projections for a certain year period.

A Detailed Cost Analysis for Starting a Peer to Peer Lending Business

Starting a peer to peer lending business isn’t difficult and almost any serious entrepreneur can start this business. The capital requirement however depends on what the objectives and goals of your peer to peer lending business is. This means that while someone in the same scale as you might start off with lower capital, yours might be larger perhaps due to the number of areas you intend to specialize in.

If you intend to start your peer to per lending business in the United States of America, then you would need to ensure you have done some of the requirements listed below;

  • Cost of incorporation $750
  • Insurance policy cost $750
  • Cost for business license $500
  • Cost of leasing a facility for at least a year $25,000
  • Cost of equipping the office with computer, phones, printers and furniture $2,000
  • Cost of launching a website $700
  • Cost of acquiring a software $1,500
  • Marketing budget would cost $1,000
  • Additional expenditure such as business cards, and signage $500

From the requirements listed above, it would cost an entrepreneur who wants to start the peer to peer lending business in the United States of America on a low scale, an average of $33,000 If you intend to start off your peer to peer lending business on a medium scale, you would need an average of $66,000

And if you intend starting your peer to peer lending business on a large scale, then you would need an amount around $133,000.

Financing Your Peer to Peer Lending Business

Even though the peer to peer lending business is one that deals in lending money out to those who need it, finance is a very important part of starting and running the business. Without finance, whatever fantastic ideas you might have for your peer to peer lending business will come to naught if you do not get the required cash to see that your idea becomes a reality.

Sourcing for cash is not easy in any way, which is why it is highly necessary to have a business plan at hand. A business plan helps you overcome the large hurdle of trying to convince investors through word of mouth. A comprehensive business plan not only shows investors and lending institutions of how serious your business intentions are.

They also ensure that the investor sees where you are headed which will help him or her decide if he wants to join the direction in which you are headed or not. If you do not know how to write a business plan or do not want to be bogged into writing one, then it would be necessary to get someone who can help you with this important aspect.

Some of the options that are available to you when it comes to raising the necessary finance with which to start your peer to peer lending business includes;

  • Approaching investors for loan
  • Partnering with a lending institution to raise cash
  • Sale of personal properties and stocks to raise cash
  • Applying for loan from a traditional bank
  • Raising loans from wealthy friends and family members

Choosing a Suitable Location for your Peer to Peer Lending Business

Since the peer to peer lending business is one that can be run from home, you might not need to be too bothered about what kind of location you should choose. However, if you intend running the business on a medium or large scale, you might need to lease a facility and this would require you making careful considerations.

You would need to look for a location that suits the kind of peer to peer lending business you intend to carry out. If you intend to give loans to businesses, then it would be wise for you to locate your business in a business district.

Another thing to consider when choosing a location is the ease of convenience for your customers and employees. There should be a place for your clients to park their cars, and also be in a place where they can freely come in and leave. This does not however mean that you should break the bank in looking for a facility. Create a budget and stick with that budget.

Starting a Peer to Peer Lending Business – Technical & Manpower Details

There isn’t much equipment that is needed when you intend to start your peer to peer lending business and this therefore means that you can afford to buy up your startup equipment and tools with little cash. If you are on a tight budget, you can get some of the items needed for fairly used and at a cheaper price.

Some of the equipment that you would need in fully launching your peer to peer lending business successfully includes;

  • Computer
  • Phones
  • Software

This is a kind of business that permits you to run from home. You can run the business alone on a small scale. If you however want to start up on a medium or large scale, you might need to lease a small facility and employ people to work for you.

Regarding the number of people you would need to employ, it would vary depending on if you are going to run the business on a medium or large scale. You would need to employ a Manager, Marketing Executives, Front Desk Officer, Loan Officers, and Security. This is about 7 to 10 people.

  • The Production Process in Peer to Peer Lending Business

This is a service based business and as such there are no huge processes involved. The peer to peer lending business involves two sets of people, the investors and the borrowers. The investors use the peer to peer platform to lend out money in return for fair interest.

The borrowers use the peer to peer platform to finance needs that require financing and to be returned at an agreed upon date.

Starting a Peer to Peer Lending Business – The Marketing Plan

  • Marketing ideas and strategies

Marketing is a very important process in any business as this is what generates income for the company. It is necessary that you craft the right marketing strategies that will be used to advertise and also promote your business in a positive light.

It is essential that you have a marketing budget that will act as a guide to what you can and cannot do. This does not mean that you break the bank due to different marketing ideas and strategies. Once a strategy is not effective, you could discard it for ones that are. You shouldn’t blindly use any strategy. Some of the strategies that can be adopted to market your peer to peer lending business include;

  • Launching an official website to promote your peer to peer lending business
  • Massive advertisement campaigns on other websites and blogs to create traffic for your website
  • Listing your business in online directories
  • Passing out handbills and fliers
  • Pasting notices in conspicuous places in your target area
  • Displaying your business on a car banner
  • Attending business conferences, student fairs and other such places to network

Factors That Will Help You Get the Right Product Pricing for your Peer to Peer Lending Business

Setting the right rates for your peer to peer lending business is very important as it will ensure that more investors and borrowers will prefer to patronize you instead of your competitors. Setting the right rates can however be tricky as you would need to strike a balance between lenders and borrowers. This can be done by ensuring that you minimize your operating expenses, while also checking out what your competitors are offering, and setting your rates accordingly.

Possible Competitive Strategies for Winning Your Competitors in the P2P Industry

Every business faces stiff competition from others in the same industry and so any proactive entrepreneur know that it is necessary to craft winning competitive strategies if you intend for your business to be well known and also have leverage over your competitors. If you give an excellent service all the time, you are likely to have an edge over your competitors that have poor service.

Another winning strategy is in ensuring that your customers go through a seamless process whenever they are applying for loans. Making your customers go through difficult loopholes isn’t going to endear them to your company and will make them seek out your competitors. Always review your processes from time to time, and continue tweaking it to make it become better.

Another competitive strategy that you can use in becoming better than your competitors is in offering other related services as this will draw more customers to you.

Possible Ways to Increase Client Retention for your Peer to Peer Lending Business

Customer retention is very important for any business that knows its importance as it means that strategies have paid off. Having loyal customers are like a goldmine to any business, and business owners who know the rudiments of business are always careful in ensuring that there are strategies in place to keep loyal customers satisfied.

Even though one might think that being a customer to a loan company isn’t a great idea, but the truth is that there will always be customers who cannot help but take loans such as students, and businesses; and so these customers will always go to where they are likely to be treated fairly.

The possible ways to increase customer retention for your peer to peer lending business is by ensuring that customers have a satisfactory experience in terms of service whenever they come to lend money. If you are known for always meeting and even surpassing your customers’ expectations, then you won’t struggle to retain your customers.

Strategies to Boost your Brand Awareness and Create a Corporate identity for your Peer to Peer Lending Business

Creating strategies for your peer to peer lending business is very important if you intend to not only boost the awareness of your brand but also create a corporate identity as well. If you want to be noticed and be a force to be reckoned with, then you would need strategies that would help you achieve this.

Your strategies would be dependent on the scale of your business, as what likely work for a small scale business might not work so well for you if you are running a medium or large scale business. Some of the strategic means by which you might need to use in boosting the brand of your peer to peer lending business include;

  • Creating a referral system that ensures that loyal customers can benefit when they refer others to your company
  • Intensely promoting your business via your official website by making customers experience as seamless as possible
  • Ensuring that your website is strategically optimized to rank in top searches
  • Using social media platforms such as Facebook, LinkedIn, Google Plus to promote your peer to peer lending business
  • Sending out newsletters to potential customers via emails
  • Advertising your website on other websites especially those that have heavy traffic

Creating a Suppliers/Distribution Network for your P2P Business

The supply system in the peer to peer lending business is very unique because even though this is a service based business, there are still suppliers, in this case the investors that are used to give out loans to those who seek it. The investors on any peer to peer lending business platform are very important as they ensure that you have a steady source of funds available to those who seek to borrow.

Due to this fact, it is essential that you treat your investors differently by ensuring they are given fair rates in return for the money lent out. Once investors know they are treated fairly, they are likely to stick with you and also tell other investors, which in return will give you a healthy bottom-line.

Tips for Running a Peer to Peer Lending Business Successfully

Running a peer to peer lending business successfully is very vital, if you intend for your business to grow and become a brand. The first thing needed to run your business successfully is the availability of funds. You need funds to be able to run your business well and also give out loans to customers that want to borrow. Getting initial funding might be a difficult task but as an entrepreneur, this is a task that must be done if you intend for your business to become a successful one.

You would also need to ensure that you have the latest software on your peer to peer lending site so that those potential customers as well as existing customers would be able to use your website and have a good experience. Try to iron out any hitches that might occur by constantly carrying out checks on all aspects of your business and having a backup plan.

Finally, more important is your customers. If your customers are satisfied with your services, they are likely to return and even help refer other potential customers to you.  Put in place a reward for those who refer others and see your business become successful and a force to be reckoned with.

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