I just finished making a Kiva loan to a woman entrepreneur in Peru. If you’re not familiar with Kiva, it’s a micro lending program founded in 2005 to “connect people through lending to alleviate poverty.” You can go on Kiva’s site and search for an entrepreneur anywhere in the world who needs a loan, and you can be the lender for as little as $25. When the entrepreneur pays back the loan (and all of my entrepreneurs have paid theirs back), you can relend it. And that’s the essence of micro lending. I’ve been doing Kiva loans for the past 4 years, but it was after the debt crisis here in the U.S. that I wondered if it might be a model that would work here. Clearly others were thinking the same thing because today there are several sites offering “peer-to-peer” lending.
The Venture Edge
Musings at the intersection of business and lifeForget banks for small loans; jump on the Internet
Business Savvy
June 27, 2011
The two biggest sites are Lending Club Corp. and Prosper Marketplace Inc., which have generated more than $500 million in loans over five years. Essentially marketplaces where private investors (the lenders) meet borrowers who need money. The borrower pays a fee to the site for the right to be connected to a network of lenders. The lenders typically put up $25 to $1,000 each for a return that Lending Club claims averages more than 9.6 percent. It appears to be a win-win situation, and the growth rate of 40% in 2010 suggests that people see the value. Surprisingly, of the $18.5 million in loans the company did that year, only 7.5% went to small businesses, with the average loan size being $13,000. Why so few small business loans , especially when traditional banks aren’t lending?
For one thing, it seems that peer-to-peer borrowers aren’t as careful to pay their monthly loan payments on time; they forget that they’re dealing with a real loan even if they’re not dealing with a real bank. Because the default rates are fairly high, it’s not as easy as you might think to get one of these loans. In fact, Lending Club regularly turns down approximately 90% of all the people who apply, generally because of low credit scores.
Peer-to-peer lending is an interesting concept, but it’s important to check out the company you want to borrow from (or invest in) very carefully. The SEC has come down hard on these businesses in an effort to get the default rate down to below 3%, which would be similar to that of banks, credit card companies, and other types of consumer credit. Treat them like a bank, pay on time, and it might turn out to be the right source of debt for you or your business.
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Related tags: Kiva, Lending Club, micro lending, peer-to-peer lending, Prosper Market
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