Person-to-person online loans. These are new options based on an old concept: a group of individuals lending to one another increases the likelihood loans will be repaid.
It worked out well for Jason Dike, who owns Airsoft Advantage in Fullerton, a store and an e-commerce site devoted to the paintball-like combat game Airsoft. Dike had already received a $12,000 loan at 17% interest from Citibank, he said, but wanted to try his luck on a better rate at Prosper.com, a peer-to-peer lending site.
At Prosper, borrowers' applications include the interest rate they want to pay, which can reach as much as 35% for the poorest credit risks. Others in the business include Zopa, Virgin Money USA and Lending Club.
Bidding for portions of his loan, Dike said, drove the interest rate down to 11% from his initial offer of 17%. The money was needed to fund a new product -- a 6-millimeter BB made of biodegradable plastic. The BBs are used in the air guns that Dike sells to game enthusiasts who value the realistic look of the plastic Airsoft guns.
At Prosper.com, the number of loans funded rose 37% last month compared with September 2007. The average loan fell to $5,544 in September from $7,715 a year ago. So lenders -- who are purchasing parts of a loan made by WebBank, a Utah-chartered industrial bank, via Prosper -- were making more but smaller loans.
The site has seen an upward shift in the credit quality of its borrowers since it launched in 2006, said Larsen, who helped create Prosper. Prime borrowers, who are those with credit scores of 720 or higher, accounted for 45% of loans made in September, up from 30% in September last year and just 21% in September 2006.
Meanwhile, subprime borrowers, those with credit scores below 600, accounted for 5% of loans as of last month, compared with 8% a year earlier and 25% in September 2006.
Prosper loans range from $1,000 to $25,000. Borrowers pay a 2% to 3% fee, which was recently raised, and are charged a fixed interest rate. Lenders also pay an annual fee to Prosper. Larsen advises small-business owners that it's easier to persuade strangers to lend if family and friends already have chipped in.
Factoring. Small-business owners looking to improve cash flow could consider selling their invoices to a finance company known as a factor. The factor doesn't pay full value, but the business owner gets the cash right away rather than waiting for a customer to pay.
