Person-to-Person Business Finance

How to get funding for your startup or early-stage business, avoiding the banks.

By William Keyser, Managing Director, WorkSavvy LLC

Person to Person (P2P) finance or social lending is a growing feature of the un-banking landscape. I forecast that it will grow rapidly. P2P finance is where people lend and borrow money with each other, sidestepping the banks.

A study by Online Banking Report predicts that by 2011 person-to-person lending in the US could surpass 100,000 loans a year, worth more than a billion dollars. Nearly three-quarters of Britons who responded to a survey in 2006 by the Social Futures Observatory (SFO) said they would consider borrowing or lending this way rather than with their high-street bank.

Social finance is the virtual aggregation of dozens, hundreds or millions of people for the purpose of conducting an economic transaction. Another name for it is crowd funding.

Business finance using the P2P route provides a great opportunity for the small or micro-business. Rates can be more attractive than those you find in the commercial market and normally you can get an unsecured loan.

You will still need to show your ability to repay, but this will be possible through demonstrating the solidity of your (business) plan. Since you will be appealing to individuals rather than institutions, the nature of your business is of critical importance.

First be very clear about your objectives and why you need the money.

If you have not worked out your plan for the business and how you intend to use the loan, it will be very clear to lenders and they will steer clear of you. It will help you as well as your ability to raise finance if you can boil down your objectives to a very clear brief statement, supported by a financial plan that makes sense. If you approach a bank they will require numbers. Even if the attitude of the personal lender may be more flexible, an individual still has a financial agenda - for making a return on the loan. It is up to you to show how that will happen.
Try: that you check your plan against some external benchmark or structure. You do not necessarily have to have a 50 page document stuffed with accounting data, but you will save yourself a lot of heartache if you check that you have thought about all the issues.

To Plan or Not to Plan is a good place to check out the right approach for you in your special situation. However you have decided to proceed, you will also find help on what to bear in mind when planning you business.

If you want to see what should appear in a full blown plan, then take a look at this Business Plan Outline.

Review the P2P finance websites.

There are a few options and more are in the planning stages, so if you do not find what you are looking for right away, then repeat your search later.
Try: that you check out the two leaders: Zopa and Prosper. Zopa is in the UK and about to launch in the US. Prosper is US-based. As a borrower or a lender on the Prosper marketplace you need transparency and information to make wise decisions. Wiseclerk is dedicated to serve as an automated clerk, offering you the information you need.

In October 2007 Globefunder will be operating in the US and other countries.

In the Netherlands Boober has just launched and hot on their heels is Smava of Germany. Peermint is about to open in Canada, Australia and New Zealand. New Zealand also will soon have Nexx. Canada also has CommunityLend (CL) on the stocks. CL says, "You can set your own rates, payback periods and meet some cool people along the way, all without paying irritating banking or investing service fees." If you would like to know about it when it launches, you can sign up for information at Loanio. Even China has Shanghai-based ppdai.

When you have selected a P2P lending site, borrowing through a group will help.

If you are unknown to the lending community, it will help you to seek a loan through a group. Within Prosper, for example there are some 4,000 different interest or geographic groups. Through such a group your affiliation will give your demand some credibility and may help your achieve a lower interest rate than on your own .
Try: that you cast around and get to understand the system before plunging in. See what others do. The Prosper Groups cover many fields. There are a couple of thousand in the 'business & professional' category. Look at a couple of different examples: the Apple User group is for Mac computer enthusiasts; the Acadian group is for people in Baton Rouge.

Take a look at what other borrowers are seeking and how they present their request.

If you see a listing that has already received quite a few bids, this may tell you something about how convincing it is to lenders.
Try: that you take a look at Anthony's Beehive on the Prosper site, for example.

Social networking offers opportunities, too.

If you belong to a social network on line, you will soon see borrowing opportunities there. You can try Craigs List, for example; look under the Financial Services heading.
Try: that you find your own 'right place'. For instance at Facebook, you will find the Lending Club that started in May 2007. There is another opportunity at the Go Big Network.

Be diligent when you borrow from friends or family.

In the 2007 Inc. magazine 500 list, published in September 2007, it was reported that other than self-finance (80.6%), loans from family, friends and business associates were the biggest source of startup capital (21.6%).
Try: that you look closely at Virgin Money. It is a P2P lending facilitation company, purchased in early 2007 by Virgin. For a modest fee they can put your loan on a business-like footing and manage the repayment process if you so decide. By using them, you are much more likely to avoid the misery of any dispute over financial matters in your close 'circle'.

P2P is already active in microfinance.

Microfinance is the provision of financial services to the world's working poor, primarily in developing countries. Microcredit, currently the most well-known product within microfinance, is the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans or other forms of credit. In contrast to hand outs, these small loans (often less than $200) enable the working poor to lift themselves out of poverty through hard work and entrepreneurial spirit.
Try: that, if you are motivated to support entrepreneurialism and world community development, you should consider using Kiva which lets you "sponsor a business" by connecting with and loan money to unique small businesses in the developing world.

MicroPlace will soon launch a service enabling individuals to find microfinance opportunities and invest in them. They will maintain a web-based, eBay-like marketplace to connect people with investable assets as little as $100 with microfinance entities needing capital.

Seek as much advice as you can before trying to take the plunge into P2P borrowing.

It is a very effective way of funding your startup or fledgling business, but that does not mean that you should enter into it lightly. Looking before you leap will give you a much better chance of success.
Try: that you look at the advice at Savvy Finance and Savvy Business Planning. A bit of surfing will be rewarding.