How a p2p Loan Can Help Grow Your Franchise

Ninety-six rejections. That’s how many times my business partners and I were turned down for a $100,000 loan to expand our profitable Snap Fitness franchise.

It was 2007 and although capital markets were tight, we thought a small loan would be a fast and easy process. We had five personal guarantors each with four times debt coverage, university educations, real estate operations experience and a successful franchise unit generating cash flow. Yet, we could not secure a loan to purchase new equipment to expand our franchise network.

The irony was, when working as successful private equity guys on Wall Street, we had bankers lining up around the corner to give us $100 million loans for high-risk businesses – concepts with no proven business models or financial history to analyze. That’s when I realized it: the American banking system was broken.

Unfortunately, tighter regulations after the financial crisis and outdated underwriting models make it difficult for banks to underwrite small business loans profitably.

According to U.S. Treasury Secretary Jacob Lew, each workday more than 8,000 businesses in communities across the country fail to qualify for a commercial bank loan.(1)

The Small Business Lending Association Educational Foundation predicts there will be a $1.3 billion franchise lending shortfall for the sixth consecutive year in 2014.(2)

Spotting the opportunity to build something better, a new wave of lenders have emerged, leveraging technology and innovative credit models to reinvigorate the archaic lending industry and help fill the franchise financing gap. Known as peer-to-peer (P2P) and marketplace lenders, these platforms function essentially as matchmakers for businesses looking to borrow with investors who want to lend – at a price that everyone is happy with.

The transactions take place online and completely cut out the long wait times and complexity of dealing with a financial intermediary like a bank or credit union, and the high cost of dealing with a shady payday lender or merchant cash advance.

As the small business financing industry continues to evolve, here are answers to some of the common questions about P2P lending:

How does P2P lending work?

A franchisee interested in a loan would complete a simple online application. The marketplace lender would then evaluate the franchisee’s financial and business information and quickly provide an interest rate and loan offer to qualified applicants. Once approved, the loan is listed on an online marketplace where investors select which loans to invest in and the funds are deposited into the borrower’s account.

Why would a business choose a P2P loan over a bank loan?

Every marketplace is different, but typically franchisees like P2P loans because of their speed to fund, simple application process and fair rates. Banks may offer the most attractive interest rates compared with other financing options, but their cumbersome application process can take as long as four months and they generally don’t lend to businesses that require a loan less than $1 million.

Instead, businesses looking for fast cash to seize an opportunity or fill a temporary gap in working capital have traditionally been forced to turn to merchant cash advances where speed comes with a hefty price and opaque lending terms. In contrast, most marketplace lenders boast transparency as a key brand tenant, and allow borrowers to apply for an affordable loan in as little as 10 minutes and, if approved, receive funds in their account in less than two weeks.

What do P2P lenders look at when a business applies for a loan?

Unlike traditional lenders, where credit score is still king, P2P lenders are using big data and technology in a more holistic approach to evaluating a business’ creditworthiness. Although your credit history is still an important gauge of your financial and operational stability, so too are metrics like real-time cash flow, your passion about the market opportunity, and even, believe it or not, your social media presence.

Before applying for a P2P loan, ensure your credit score is healthy, get your financials up-to-date and be ready to talk about your experience with credit and how a loan will make a positive impact on your business’ bottom line.

How much does a P2P loan cost and how does that compare to other forms of financing?

Interest rates vary considerably between lenders and depend on an array of factors from the type of financing and term to the creditworthiness of the borrower.

With so many options, it’s vital to do your homework and compare rates. Some lenders quote their loan rates in terms of a discount or fee, which can make it difficult to compare to a lender that advertises annual interest rates.
One of the best ways to compare the cost of borrowing is to convert the cost of each loan into an APR (annual percentage rate), which includes both the interest rate and fees that you pay for a loan. Fundastic, an online resource for small business financing advice, features some great calculators to help businesses calculate the APR on different financing options to compare the true cost of borrowing.

Sam Hodges is co-founder and U.S. managing director of Funding Circle, the world’s leading online marketplace for small business loans. He is responsible for overseeing the overall strategic direction and day-to-day operation of the company in the United States.

For more information on franchise loans, please visit:

1 Pages/jl1979.aspx
2 Data from 2014 FRANData Small Business Lending Matrix, as compiled by Franchising World in their “Lending Gap is Diminishing” article, June 2014 issue.

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