Peer to Peer Lending for Small Businesses: Kiva Extends Microloans to US Entrepreneurs
The peer to peer lending (a.k.a. person to person or social lending) success story Kiva.org has expanded its lending operations to U.S. small businesses. If it's pilot program works, Kiva hopes to bring its developing world microlending success to more small businesses in the U.S.
Kiva, based in San Francisco, was inspired by the Nobel Peace Prize winning Grameen Bank of Bangladesh and its founder Muhammad Yunus. Yunus' innovation was simple, elegant, and has proved incredibly useful: small locally geared loans to those deemed uncreditworthy by traditional banks are very often repaid dutifully and give recipients the bit of capital they need to succeed as entrepreneurs.
Kiva has had great success in putting some peer-to-peer into microlending. It works by allowing individuals to simply go online, browse amongst entrepreneurs in the developing world, and lend small amounts (such as $25) via PayPal. The funds are distributed by Kiva's local microfinance partners in specific regions (who also vet the applicant entrepreneurs). Lenders can track their recipient's progress online, and the recipient's pay back the money over time.
Kiva lenders receive no interest. Borrowers do pay some interest, which goes to finance the local microfinance partner. Kiva does not guarantee repayment, but cites a 99.7% repayment rate on loans made so far (a number would make a traditional lender drool).
Now, as reported by the San Francisco Chronicle, Kiva has launched a pilot program to fund micro-businesses in the U.S. Kiva lenders can now lend to 18 San Francisco Bay Area entrepreneurs and 18 from New York. Kiva international loans are limited to $3,000, but U.S. based businesses can borrow up to $10,000. To identify eligible businesses, Kiva partnered with Opportunity Fund and Accion USA, groups that have been lending to local small businesses in the Bay Area and New York, respectively.
If the pilot works, Kiva plans to open lending up to more U.S. small businesses. This would be welcome news both to entrepreneurs looking to make it and individuals wanting to help pull us out of economic doldrums by doing something other than blindly consuming. As Eric Weaver, CEO of Opportunity Fund told the Chronicle, "[s]mall and microbusiness is the only category of business that is creating jobs right now - large companies are shedding workers. This is a tangible way to be part of the economic stimulus, instead of going out and buying a new TV."
Hopefully, Kiva's arrangement of having individual lenders make no interest will help it avoid running afoul of securities laws. In the past year, state securities regulators and the SEC have cracked down on some peer to peer lenders on the theory that because individual lenders get a promise of future interest on loans without collateral, the groups are actually selling securities and must register with the SEC.
- Small businesses thrive with micro loans (ABC 7 Bay Area)
- Peer-to-Peer Lending: Problems and Promise (Business Week)
- Why Prosper.com Halted New Loans -- Again (WSJ's The Wallet)
- Start-Up Financing (FindLaw)