Business Social Loans
As the bank squeeze hardens, more and more people are turning to Social, or P2P Person-to-Person borrowing. Social lending gives friends and family a more structured way to lend or borrow money with each other.
The money is likely to be more easily available and generally involves unsecured loans. If you are organizing the loan yourself, then of course you can set any conditions you want, more or less.
If you are borrowing from friends or family, you need to be aware of not jeopardizing the lenders tax situation. The IRS applies a rate of interest to the lender, even if that person does not want to charge you any interest.
You will need to agree a repayment plan, which can be on either an amortized, graduated or seasonal basis.
Amortized: This first repayment method is basically level, with lowering proportions of capital repayments at the outset, but with a fixed monthly amount—good for budgeting.
Graduated Repayment is where you could for instance set what is called a balloon, or low monthly amounts with the major proportion at the end of the loan’s life—good if you think you need lots of help at the outset, but that you will have generated a big enough lump of money later.
The Season Basis for loan repayment helps those who have wide variations in cash flow as a result of the special conditions that pertain in their market.
The market has seen arrivals and departures in the US in the recent past, because the SEC has very tight controls. That is one of several reasons why it makes every sense to use an intermediary to ‘regularize’ and administer the loan.
Even where you do not use a ‘third party’ to administer your loan, it is vital to prepare the promissory note that regularizes their transaction. A promissory note will
- identify both the borrower and the lender by name
- state that the lender has given the borrower a sum of money
- set out repayment terms (amount/dues dates)
- describe what happens in the case of late or missed payments and defaults
- be signed by the borrower and the lender.
Help is at hand in the book (and CD), Investors in Your Backyard: How to Raise Business Capital from the People You Know. It’s written by the founder of Circle Lending, the forerunner of the now defunct Virgin Money, Asheesh Advani. It is a book that should be on every entrepreneur’s bookshelf.
LendingKarma, a San Francisco based company that is focused on providing services that help facilitate person-to-person lending. You can use them to protect your relationship, while you protect lenders and yourself. LoanBack is another company that has created a very simple process for formalizing and servicing personal loans whether you are the lender or the borrower. Even simpler is One2One Lending. WikiLoan is also a website that provides tools for peer-to-peer borrowing and lending. At the end of the alphabet comes ZimpleMoney, a social finance community that connects people with common financial interests, and provides online tools for managing financial relationships in a socially networked environment.
Online Lenders have had a rough road with the SEC, since they are not a traditional source of loans and they don’t quite fit any established categories.
Prosper actually shut down for nine months to comply with SEC rules, but is now back online and lending. Chris Larsen, the founder of Prosper claimed that it was incorrect to be classified as an investment bank, and argued that the SEC was “putting a round peg in a square hol.” The British operation Zopa, has quit the US market.
Notwithstanding all this, Gartner Group forecasts huge growth of the sector. Their research suggests that it will grow to a $5 billion business by 2013, and that social-banking platforms will have captured a big chunk of the available worldwide market for retail lending and financial planning.
Lending Club is an online financial community facilitating loans and issuing publicly-offered securities through their online platform. We bring together investors and creditworthy borrowers to offer value beyond traditional banks.
Lending Club was born as a social lending network allowing borrowers with good credit scores (minimum 660 FICO) to obtain loans at attractive rates, while offering lenders an opportunity to fund these loans, assume the risks and benefit from the returns associated with them.
As Lending Club points out, both borrowers and lenders are better off through social lending.
Prosper is an online destination for borrowing money and investing in loans. Prosper’s auction model provides an open and transparent way to get a personal loan or invest in loans on terms that are favorable to everyone involved in the transaction.
Prosper was launched 2006 and has over 960,000 members with more than $197,000,000 in loans funded.
The way Prosper works is intuitive to anyone who has used an online auction. Instead of listing and bidding on items, people and institutions list and bid on loans using Prosper’s online auction platform. Borrowers can list loan requests between $1,000 and $25,000. They set the maximum rate they are willing to pay an investor for the loan, and tell their story.
Borrowers with good credit (640+) post a loan listing and lenders invest $25 or more towards the loan. The interest rate may get bid down in the auction process. The interest rate is fixed for the life of the loan, so monthly payments are fixed, and are automatically deducted from the borrower’s bank account. There are no hidden fees and the loan can be paid off early without penalty. All Prosper loans are unsecured 3-year fully amortized personal loans.
This is a fast growing field with many companies moving into the business or crowdfunding. It is very likely that this market will continue growing, not only in volume, but complexity, with many more offers being open to entrepreneurs. Profounders, for example arranges loans that pay royalties on sales, rather than conventional interest on loans or dividends/capital growth on equity.