Peer-to-peer lending grows

Some small-business owners, rejected by banks or fed up with bad lending terms, are turning to Internet sites that match borrowers with giant pools of lenders when they need funds. That has driven growth and increased the public profile of a sector that was briefly shut down by regulators during the financial crisis.

In the past year, Prosper Marketplace Inc. and Lending Club Corp., which run the nation's two biggest peer-to-peer lending sites, have reported a sharp upturn in personal loans used to fund small businesses. The sites work like eBay-style marketplaces, matching prequalified borrowers to lenders.

Together, the sites have generated more than $500 million in personal loans in the past five years. And while most of the loans are used to pay off credit cards, the proportion of the funds used to finance small businesses is rising.

In November, Nansee Kim-Parker raised $20,000 on LendingClub.com in less than two weeks to open TokyoMoto, a San Francisco motorcycle-repair shop. After clearing a prescreening process, she posted details of her background and her business idea and attracted hundreds of small lenders from around the country. Her loan has a three-year fixed interest rate of 9.85 percent.

"It's like a village, gathering support here and there," said Kim-Parker, who calls traditional bank credit "unaffordable" for small businesses.

Lydia Hamilton-Monnie says she was turned down by three banks before raising $25,000 on Prosper last year to open a plus-size women's apparel store in Milwaukee. With a three-year fixed rate of 12 percent on the loan, Ms. Hamilton-Monnie says she is on track to pay back her nearly 1,000 lenders by December 2012.

Peer-to-peer lending sites, which first appeared in the U.S. five years ago, charge borrowers a fee for connecting them to a network of lenders, who put up anywhere from $25 to $1,000. Lenders are paid back with interest, with the rate set on the basis of a site-assigned credit rating, minus the site's fee. Most loans are for less than $10,000, but they can exceed $30,000.

Since riskier borrowers offer lenders better returns, the sites often back loans that many banks would reject out of hand or approve with higher interest rates. But by spreading risk, peer-to-peer loans tend to have lower interest rates than comparable bank loans, consumer-credit experts say.

As a result, they're filling a niche for small-business credit. Indeed, according to Federal Reserve data, as many as 80 percent of the nation's small businesses haven't applied for a bank loan in the past five years, with many expecting to be rejected or unable to afford the terms.

To continue reading this story, click here. Also check out our May story on how Jamestown Feed & Seed and Lawn Center got creative with borrowing.