The term “sweat equity” is often used for this type of contribution as the owner will often reward such loyalty with a small percentage ownership of the organization in lieu of cash. A variation on this is barter or trade. This is a method by which you could provide a needed service such as consulting or management advice in return for the resources needed for your start up. This needs to be accounted for in your accounting records also.

Person-to-Person Lending

Somewhat similar to raising money from family and friends is person-to-person lending. Person-to-person lending (also known as peer-to-peer lending, peer-to-peer investing, and social lending; abbreviated frequently as P2P lending) is a certain breed of financial transaction (primarily lending and borrowing, though other more complicated transactions can be facilitated) which occurs directly between individuals or “peers” without the intermediation of a traditional financial institution. However, person-to-person lending is for the most part a for-profit activity, which distinguishes it from person-to-person charities, person-to-person philanthropy, and crowdfunding.

Lending money and supplies to friends, family, and community members predates formalized financial institutions, but in its modern form, peer-to-peer lending is a by-product of Internet technologies, especially Web 2.0. The development of the market niche was further boosted by the global economic crisis in 2007 to 2010 when person-to-person lending platforms promised to provide credit at the time when banks and other traditional financial institutions were having fiscal difficulties.

Many peer-to-peer lending companies leverage existing communities and pre-existing interpersonal relationships with the idea that borrowers are less likely to default to the members of their own communities. The risk associated with lending is minimized either through mutual (community) support of the borrower or, as occurs in some instances, through forms of social pressure. The peer-to-peer lending firms either act as middlemen between friends and family to assist with calculating repayment terms, or connect anonymous borrowers and lenders based on similarities in their geographic location, educational and professional background, and connectedness within a given social network.

In a particular model of P2P lending known as “family and friend lending”, the lender lends money to a borrower based on their pre-existing personal, family, or business relationship. The model forgoes an auction-like process and concentrates on formalizing and servicing a personal loan. Lenders can charge below market rates to assist the borrower and mitigate risk. Loans can be made to pay for homes, personal needs, school, travel, or any other needs.

Advantages and Criticisms

One of the main advantages of person-to-person lending for borrowers has been better rates than traditional bank rates can offer (often below 10%). The advantages for lenders are higher returns that would be unobtainable from a savings account or other investments.

As person-to-person lending companies and their customer base continue to grow, marketing expenses and administrative costs associated with customer service and arbitration, maintaining product information, and developing quality websites to service customers and stand out among competitors will rise. In addition, compliance to legal regulations becomes more complicated. This causes many of the original benefits Tennessee payday advance from disintermediation to fade away and turns person-to-person companies into new intermediaries, much like the banks that they originally differentiated from. This process of reintroducing intermediaries is known as reintermediation.

Person-to-person lending also attracts borrowers who, because of their past credit status or the lack of thereof, are unqualified for traditional bank loans. The unfortunate situation of these borrowers is well-known for the people issuing the loans and results in very high interest rates that verge on predatory lending and loan sharking.