Small businesses turn to customers and peers for loans

It's a tough time for many businesses to get loans, especially small businesses that don't have the same assets that larger businesses can use as collateral.

This trend is sending more business owners looking for alternate funding, but unlike the business founders before them who turned to parents, friends and rich uncles; they are turning to a new group of investors to fund their expansion.

TheStreet.com recently profiled the Milk Thistle Farm in New York, which with the help of an organic investing group is asking customers to lend the farm money to double its herd.

Loans such as this aren't unique to the organic food industry. LendingClub.com provides a similar service on a much broader scale. Lending Club is a peer to peer lender which connects individuals and businesses with their peers to provide financing for all kinds of products.

Using this lending model Lending Club has issued more than $37 million in loans, over $12 million of which have been used for businesses, including a new Turkish grocery store in California; an indoor baseball/softball training academy in Massachusetts; and a number of eBay-based businesses online.

As our own Jennifer Openshaw pointed out recently, now is a great time to start a small business and while she recommends hunting down any venture capital source you can find, peer to peer lending is another great source of funding.

Renaud Laplanche, CEO of Lending Club, shared his opinion with WalletPop: "While small business owners are becoming more optimistic about the timing of the economic recovery, the challenge is that most small businesses are still finding it very difficult to get the credit lines they need. Lending Club's online community offers creditworthy small businesses and individuals the chance to quickly and easily get a fixed-rate loan at a better rate than banks."

Aside from available credit and competitive interest rates there is one more significant benefit to borrowing from your peers -- passion. Peer to peer lending thrives on its ability to connect individuals with funds to businesses they are passionate about; something that is almost impossible to do at a bank.

A customer of Milk Thistle Farm sums it up best, "Why not do it (invest) in something you really believe in?"

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