Liz Hamburg

Borrowing from Strangers

The Internet has made it easy for people to go online find everything from a date to a used car. Social networking has taken things one step further with people creating communities around shared interests. Now the web is making it easier to borrow money from a community of strangers using a concept called “peer-to-peer lending”. It’s not a new concept for entrepreneurs to reach out to “friends and family” for early stage funding. This is one of the most popular ways of getting capital for many small and emerging businesses. But now, entrepreneurs are using the web to find virtual “friends & family”--strangers willing to give them a loan. At a time when access to capital is still very tight, this is an interesting option.

I recently interviewed a former Wall Street trader turned restaurant entrepreneur who has gotten over 100 strangers to invest in his business without ever meeting them.

David Morris and his brother Dan were both Wall Street guys but their dream was to open a neighborhood restaurant on Long Island. Nothing fancy—hot dogs and burgers. They had a name—JimmyJacks and a dream. David left his job on Wall Street in 2009 to spearhead the plans. They were ready to put their money where their mouth was (literally!) and get started. They invested $90k of their own money, but they needed an extra $20-25k for contingencies. They were well-connected on Wall Street and had good credit, but over 20 banks turned them down. Even the SBA could not help. “We were a little let down. We were surprised that we couldn’t get the money,” David said. Some banks said the amount they were looking for was almost too small. They were told that if they needed $250k it may have even been easier to get a loan or go to an angel investor group.

So, they turned to strangers, using a relatively new concept called “peer-to-peer lending”. There are several companies now offering this. One of the largest is Lending Club, started in 2007. Most peer-to-peer lenders, including the Lending Club, match individual lenders with individuals seeking loans for everything from weddings, credit card repayments and auto loans to small business loans. For entrepreneurs looking for relatively small amounts of capital—usually $25k or less, this can be a good, fast way to access money.

The application is fairly simple--almost as easy as a credit card application. You need good credit, some income and you need a compelling story. Investors can choose to invest based on a number of criteria including interest rate, amount of the loan and what the loan will be used for. For many, they are looking at this just as an investment but for many it’s also a way to do something good with their money and help out a stranger. This is where the social networking comes in. People want to feel connected to the loan recipients and sometimes to other lenders in the online community. So, a compelling story can help.

Almost immediately as soon as the Morris’ loan was posted, people started emailing them and asking questions directly. They watched their loan total growing in real time. According to Lending Club, most loans are funded within two weeks.

Sure enough, within two weeks, 100 lenders—all strangers-- had lent them $20,000 (an average of $200 per microloan); Terms were better than they could have gotten from most banks- 3 yrs at around 13%.

The Morris brothers are not alone. On Lendingclub.com, I found a $10k loan request that had been posted for a little over a week and was 96% funded. Another, for $25k was also posted 10 days ago and was already 30% funded. Lending Club has funded over $86m in loans since they started in 2006—that’s over 9,000 loans. That number has more than tripled in the last year.

And other peer-to-peer lenders like Prosper are also growing although Pertuity Direct, a competitor closed down in 2009. Kiva.org has gotten a lot of buzz and focuses on international micro-finance loans to small businesses mostly in emerging markets. They are a non-profit though, so investors get their money back but without interest.

Peer--to-peer lending is not without some controversy —it’s a fairly new concept that the SEC seems to be taking a much closer look at. Lending Club is registered with the SEC and issue prospectuses for all loans. But, as with anything where money and strangers are involved, investors and entrepreneurs should do their homework and make sure that you are working with a reputable group.

Listen to my interview with the David Morris on WOR Radio

Launchpad

Launchpad is heard live every Monday at 12:40 pm. on WOR News Talk Radio 710 AM.

"Serial entrepreneur" Liz Hamburg and her mother Joan Hamburg bring you inspiring stories from small business owners and entrepreneurs. Launchpad also offers expert advice on how to finance your business, how to market it, how to deal with employees, health insurance and lots of other important topics. Winner 2009 New York SBA Small Business Journalist of the Year.

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Liz Hamburg

Liz Hamburg is a “serial entrepreneur” with extensive experience as an entrepreneur, angel investor and mentor to entrepreneurs and small businesses. She is the founder and President of Upstart Ventures, where she has consulted to and incubated many start-ups including her latest venture, ApplyWise, an online college admissions counseling company.

She is the co-host on WOR radio (WOR 710AM) of “New York Uncovered” and “Launchpad”. She also blogs about small business for the Huffington Post. She is New York’s SBA Small Business Journalist of the Year.

Liz was one of the founding managers and Director of the Board of Vimpel Communications (NYSE:VIP), the leading cellular company in Russia. She has launched new products for Reuters Tokyo and Fujisankei Communications, where she worked on the first international television home shopping show and played a leading role in the introduction of Fuji’s Nintendo game software into the U.S.

Liz received an MBA from Northwestern’s Kellogg Graduate School of Management and a B.A. from Brown University. She is a Director of the Board of Safe Space www.safespacenyc.org; the President of the Advisory Board of the Brown University Entrepreneurs Program, a member of the New York advisory board of Astia (www.astia.org) and a member of the Advisory Panel of the Columbia Business School's Eugene Lang Entrepreneur Initiative Fund. She is a frequent lecturer on topics concerning entrepreneurs and women-owned businesses.

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