Loans From Strangers Can Help a Start-Up to Prosper
When the owner of the bookstore where Briana Stewart was working asked her to set up a coffee shop, Stewart pictured it as a kitschy, dog-friendly place serving up gourmet java in her Georgia town. But Stewart didn't have the bank account to get things rolling, deep-pocketed friends willing to put up money, or the time to apply for a small-business grant or loan for her venture.
Desperate to jump on the chance before the Book Worm's owner decided instead to use the space for storage, Stewart turned to another start-up, San Francisco-based Prosper, to raise $15,000. Prosper allows prospective borrowers to post requests on its website for three-year loans at an interest rate they propose. Anyone willing to bite competes with other lenders to fund a piece or all of the loan. The more competition, the lower the interest rate.
"I was very skeptical," says Stewart. "But I thought it certainly wouldn't hurt to give it a try." The 34-year-old former English major put up a profile detailing her idea and business credentials. It also included her Prosper-verified credit score, debt-to-income ratio, and photo.
Launched just over a year ago by E-Loan cofounder Chris Larsen, Prosper has already attracted 200,000 users. Many of the site's borrowers are small-business owners like Stewart, and others include overstretched consumers looking to pay off credit card debt. Lenders dole out $120 per loan on average. Usually, says Larsen, they spread small amounts among a large number of Prosper borrowers. Low-risk AA listings like Stewart's have recently attracted lenders at rates typically ranging from 7.8 percent to 13.5 percent.
Homework. Getting lenders to hand over their money to perfect strangers seems like a tough proposition, but so far the site has brought in $40 million from people looking for an alternative investment. "It's a throwback to the early days of lending, when people borrowed money from their neighbors," says Larsen. Lenders can use a tool on the site that automatically invests their money, but Larsen says most people "enjoy the process of vetting people. There's an emotional satisfaction to it."
That was only part of the attraction for lender Jack Veenstra, a Google computer programmer. "It's kind of addictive," he says. "I look for people I identify with." He also likes the chance to earn a higher return than he'd get from a bank. Since last June, Veenstra has made 43 loans totaling $9,000, including one to Stewart, and so far he has had only one borrower who has been three months late. A typical request on Prosper is $5,000, and only about 3 percent of the site's loans are more than three months behind in repayment, Larsen says.
Borrowers apply to the site's member groups to boost their credibility and help them navigate the process. Stewart's initial request got few takers because some members of the group she had joined had bad debts. After joining a group called Maryentom after the Florida couple that started it, her second attempt worked. Within two days, she had enough offers to fill her $15,000 request. During the remaining eight days that her loan request was posted, lenders kept trying to get in, bringing the interest rate down to 10.65 percent. Ninety-two people ended up lending her amounts ranging from $50 to $2,500.
Stewart thinks her story, "the romance of the whole idea," pulled people in. She moved to Georgia in 1998 from coffee capital Seattle. In 2005, she left her job at a school supply company for the Book Worm in Powder Springs, near Atlanta. The chance to open the coffee shop "seemed like such a fun thing to do," she says.
The shop opened last August. Stewart, who is expecting her first child, says she is breaking even, but after the baby comes, she plans to expand her offerings. "You can be out walking your dog and stop in for coffee and pastry, and get a dog treat," she says. "It makes it a little different and separates me from the typical coffee shop."
This story appears in the March 12, 2007 print edition of U.S. News & World Report.
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