A loan with a little help from your peers
With the credit crunch making it harder for even those with good credit to get a loan, small business entrepreneurs are increasingly turning to peer-to-peer lending. Stacey Vanek-Smith talks to a few who have prospered.
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TEXT OF STORY
Renita Jablonski: Small business owners are looking for new sources of capital. Many entrepreneurs came to rely on home equity as a cheap source of cash to start or grow their businesses -- but then came the subprime crisis. Stacey Vanek-Smith has more.
Ze'ev Feig: This is our first shirt -- a compression shirt featured in bicycling magazine.
Stacey Vanek-Smith: Ze'ev Feig founded Zensah four years ago, and the company's done well. It makes high-performance athletic clothing for the likes of the New York Nicks and the Boston Celtics.
When he needed money to expand, Feig looked to his house. He had an excellent credit score, about $100,000 in untapped equity, and a profitable business. The bank said no.
Feig: I'm personally surprised that after four years of having a business that's showing tremendous growth, I can't walk into a bank and get a loan.
Sastry Rachakonda is with research firm Discover Small Business Watch. He says as the credit crunch gets worse, equity lines are drying up.
Sastry Rachakonda: Thirty percent of the small business owners have used their home as a source of funding, and around 35 percent feel there has been an impact on their business because of slowdown in housing market.
Zensah's Ze'ev Feig is among them:
Feig: Right now we're small, but we're growing. And there's no question if we had the funding that we needed, we could be so much bigger.
Without his house to tap, Feig was forced to look elsewhere. He first turned to credit cards. Then he discovered peer-to-peer lending. It's kind of like eBay for loans. Businesses post the amount they want to borrow and the interest they're willing to pay, and anyone with $50 can play venture capitalist. Prosper is the largest such site with about 700,000 members.
CEO Chris Larson says his business has grown six-fold in the last two years:
Chris Larson: What we're seeing now is well-qualified people that used to have no problem getting funding from lots of sources now coming to peer-to-peer lending.
Larson says the average loan on Prosper is around $6,000 and small business owners make up about a quarter of his borrowers. He says entrepreneurs like it because they get rated by Prosper, but they get to have a voice, too, and make a case for their business that goes beyond profit and loss.
Larson: Maybe I could put a video of my, the store I'm opening, I can tell about my business plan, how excited I am, I can get customers to endorse me.
Zensah's Ze'ev Feig took out a loan on a peer-to-peer site. He says it was fast and easy. The maximum loan, though, is just $25,000. But that could change -- peer-to-peer lending is expected to be worth about $5 billion by 2010.
I'm Stacey Vanek-Smith for Marketplace.
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