There is more than one way to borrow money. Whether you run a business or need a personal loan, it is not a given that you need to run down to the local bank or credit union to fill out a loan application. You have alternatives. Two of them are peer-to-peer (P2P) lending and hard money. Both types of lending are similar in some ways but drastically different in others.
Both Are Private Lending
The main similarity between the two types of lending is that they are both private lending. Neither P2P platforms nor hard money lenders are banking institutions. They are not licensed as banks or credit unions. In fact, some P2P platforms aren’t licensed at all. As for hard money lenders, they are licensed in their respective states.
Actium Partners is a Salt Lake City hard money lender licensed to write loans in Utah, Idaho, and Colorado. Similar companies are located across the country.
Both Involve Private Money
As private lending, P2P and hard money lending involve private money, which is to say that their funding comes from individuals who choose to invest their money for lending purposes. But there are differences in how it actually works.
In a hard money scenario, you might have a number of wealthy investors pooling their money in a fund that they either manage themselves or trust to a fund manager. The fund manager is responsible for making and collecting loans. When the fund manager is a separate management company, it earns its money based on fees, commissions, or a combination of both.
A P2P scenario is a bit different. P2P investors sign up with a lending platform (usually online) and make a deposit, just as if they were depositing into a bank. A platform could consist of just a few investors or hundreds of them. It is managed by the party who actually owns it.
Hard Money Is More Focused
In terms of the differences between P2P and hard money lending, one of the most notable is focus. Hard money’s focus tends to be considerably more narrow. For example, most of Actium Partners’ loans go toward funding commercial real estate investments. By and large, hard money is reserved for investment and business needs.
P2P platforms are more liberal in terms of who they will lend to. Businesses, entrepreneurs, investors, and individuals are all welcome to apply. Each loan application is reviewed based on its own merits.
Hard Money Amounts Tend to Be Bigger
Another significant difference is that hard money loans tend to be sizable. They tend to be much bigger than their P2P counterparts. This is understandable given the fact that hard money lenders favor businesses and investors.
It is not unusual for a hard money loan to be worth millions of dollars. In fact, some of the biggest loans ever made have been hard money loans obtained to cover corporate mergers and acquisitions. By contrast, P2P loans tend to be smaller. They can be as small as a few thousand dollars being borrowed to consolidate credit card debt.
Both Are Short-Term
Finally, both types of lending are designed to be short-term. Getting a 30-year loan from a hard money or P2P lender is virtually unheard of. You are looking at anywhere from 3 to 36 months, max.
Banks and credit unions are not the only game in town. When people need to borrow and they do not want to go the conventional route, hard money and P2P lending are viable options. Both have their pros and cons, so it is important that borrowers do their homework.