As the credit markets continue to tighten, the housing markets continue to drop, and the economy continues to falter, small businesses across the country are finding it increasingly difficult to gain access to capital. In fact, a recent NSBA study showed that only 67 percent of small businesses were able to obtain adequate financing -- the lowest reported level in 12 years.

The squeeze on traditional sources of capital has left many small-business owners feeling like they have nowhere to turn. Luckily for the small-business community the entrepreneurial spirit has been sparked in non-traditional lending markets. A new trend, known as Peer-to-Peer (P2P) lending, is emerging as a growing source of capital for many small business owners and entrepreneurs.

So what exactly is P2P lending? The P2P lending model is an old concept reinvented for the digital age. It is a way for people to share what for the past half century has been a purely financial transaction brokered through large financial institutions. Through the online P2P lending model, borrowers post their stories on vendor Web sites, such as prosper.com and lendingclub.com, to solicit capital for their needs. The stories are often creative, emotional appeals for specific monetary needs ranging from financing a business venture to buying a motorcycle. Lenders then read through the stories and assess whether or not they would be interested in investing in the individual's opportunity.

Online P2P lending does have an organizational process to it, with slight variations for each vendor, to help mitigate risks associated with lending. The typical P2P online model is as follows:

• Vendors review the stories and credit scores of people who want to borrow and assign risk levels to the borrower.


• Lenders (individual P2P members) review the stories online and then make loan offers. Loan rates vary depending on the risk the lender wants to assume.


• Borrowers (also P2P members) review the offers and select their picks.


• Multiple lenders generally fund the loans. Some P2P vendors, in fact, require lenders to diversify their loan portfolios.


• Borrowers enter into legally binding contracts with their lenders.


• Borrowers repay monthly by direct debit.


• Vendors employ collection agencies in case borrowers miss payments. The agencies use the same recovery process traditional financial institutions use.


• Vendors profit by charging borrowers transaction fees and lenders annual servicing fees.

For the lenders, returns on small investments in microloans compare favorably with other traditional investment options. For borrowers, the interest rates they receive on the loans are often more favorable than those of traditional lending sources.

While the P2P online lending model has been around for several years it is expected to grow vigorously over the next two years given the bleak economic outlook. Kiplinger.com estimates that P2P lending will increase to $5 billion per year by 2010, a significant rate of growth compared to the approximately $300 million lent by P2P lenders in 2006.