It sounds like a fledgling entrepreneur's dream come true. You need a small loan to start your business, but you have no credit rating or collateral with which to impress a bank.
No problem. You can turn to peer lending. Your application will be weighed on the basis of your business plan and your personal character. And you'll join a lending circle of like-minded owners who offer ideas and encouragement.
Peer lending, which has its origins in developing countries, is now a growing movement in Canada.
A lending circle is a group of individuals supporting each other by meeting monthly to share business success stories, marketing strategies and business development ideas, while also encouraging each other to keep current with their loan payments.
|Larry MacDougal, Business Edge|
|Erin Melnychuk, left, a business development co-ordinator with peer lender Momentum, discusses a loan with Danielle Duguay of Blood, Ink & Steel Tattoo Studios in Duguay's Calgary studio. |
Vancouver City Savings Credit Union was one of the first Canadian credit unions to offer peer lending, starting in 1998. Until last year, Vancity's average annual portfolio of peer loans was about $100,000. But that grew to $150,000 in 2007 and is expected to reach $200,000 this year.
"Our peer loans are one of a number of specialized loan products we offer to folks who traditionally find themselves 'under-banked' by other financial institutions," says Catherine Ludgate, manager of community business banking for Vancity.
Vancity's peer loans usually start at $1,000 per borrower in a lending circle, or if the members of the circle are graduates of a self-employment program, then the loans start at $2,000.
Most members take three loans ($1,000, then $2,000 or $2,500, then $3,000 or $4,000) before "graduating" to conventional credit.
They graduate, typically, when they have built or rebuilt their credit history, and have grown their small home-based business into something larger.
"The repayment rate is about 96 per cent, which we consider tremendously successful for these small loans," says Ludgate.
Don Dorofay is typical of the program's borrowers. He runs a video-production and graphic-design business out of his home, serving a niche market of musicians and other independent artists.
Dorofay started with a $500 loan, eventually moving up to $5,000. He took his most recent loan four months ago at prime plus four per cent, with a three-year repayment period. He is using the money to buy a high-definition video camera "to keep up with HDTVs."
"My loans officer is my peer lending group," says Dorofay. "We know each other and each other's businesses."
Because the members of the lending circle are in similar businesses, Dorofay says he can communicate his plans to them in language that would be alien to a traditional banker.
Many of the participants in Vancity's peer lending are immigrants from developing countries who lack a credit reporting history or assets. One-third are from Africa.
Others are Aboriginals living off reserve who don't have a credit history. And many are single moms who have taken a self-employment program seeking new ways to manage their lives with infants.
Typical businesses include catering, sewing/tailoring, handcrafts, jewelry arts, small-scale importing and resale, and beauty and health products. All require little inventory or overhead, and can be done from a small home base.
For its peer loans, says Ludgate, the approval rate is about 70 per cent. Some loans are declined outright, others are sent back to be reworked or are reconsidered for a lesser amount or a different payment schedule. "The time spent in a training program like self-employment really improves the viability of the business plan, in our estimation," adds Ludgate.
In addition to some credit unions, community economic development organizations also do peer lending.
One such group, Calgary-based Momentum, has made more than 300 micro-business loans, investing more than $900,000 in the past decade.
A registered charity, Momentum has two portfolios, one for entrepreneurs with disabilities and the other for people who have taken self-employment programs.
"The vast majority can't offer collateral," says Erin Melnychuk, business development co-ordinator at Momentum. "So most of the time, they cannot access bank credit. Some have credit cards, but if they're looking longer term, the higher interest rates on credit cards would be a problem."
Momentum makes 95 per cent of its loans on the basis of character. All applicants have to present a business plan, and a loans program officer evaluates their character through the plan-development process.
The key trait is honesty. How well do the applicants fulfil their existing obligations, such as credit card and rent payments? Do they regularly attend their peer group meetings? (They are expected to attend a minimum of four business peer-support group meetings in order to apply for the loan.)
The applicant's income level is also a major factor. For example, an applicant in a four-person family must have a household income below $36,247 to be eligible.
The initial loan is up to $5,000. Once it has been repaid, clients can seek a second loan up to $7,500. The interest rate is prime plus 1.5 per cent.
In the event of a default, "they need to phone us and let us know they're in trouble," says Melnychuk. "We're flexible. We may extend the loan repayment period. But if they don't contact us, we report them to Equifax and refer the account to a collection agency."
Danielle Duguay of Calgary became a recent client of Momentum, enrolling in a six-month entrepreneurship program before launching Blood, Ink & Steel Tattoo Studios with her husband. She had previously been a stay-at-home mom to her two young children. "It's hard to find a good job when you haven't been working for five years," she says.
With her husband's experience as a tattooist, the couple had, for several years, weighed starting up a studio to do tattoos and piercings and sell body jewelry. When potential investors for the venture backed out, she turned to Momentum for a $5,000 loan and last May opened the studio in downtown Calgary.
"It's really rewarding to have a situation where you can do it for yourself," she says.
Most of the funds were spent on a computer, a carbon-copier for making stencils and on related art supplies. The studio serves about 20 clients a week, mostly "well-educated women in their 30s and 40s," she says. Duguay, who sports a mermaid tattoo from her hip to her ankle, got the Momentum loan at prime plus 1.25 per cent, and hopes to have it paid off in under two years.
"It's a booming industry," she says. "We're doing pretty well right now."
The latest fad in peer lending is online auctions, a concept popularized by the U.S. service Prosper.com and the British service uk.Zopa.com.
The Canadian pioneer was IOU Central, in Montreal, but it was short-lived. Launched in February, it was forced to shut down a week later by the Quebec Securities Commission over regulatory concerns.
"Posting of new loan requests and the placing of new bids on loans has been temporarily stopped," says its website. "Any loans which have already closed and been funded will be repaid and serviced in accordance with the borrower and lender agreements."
IOU Central says it will co-operate with the regulators in order to resume its operations.
CommunityLend, a Toronto-based online lender that announced a $2.5-million round of venture capital funding last December, is scheduled to begin its activities this summer. CEO Michael Garrity says his service has spent eight months trying to satisfy securities regulators across Canada.
Prior to co-founding CommunityLend, Garrity was vice-president of sales and marketing at epost, the online bill presentment and payment service. Barry Campbell, a former Liberal MP, is chairman of the board.
If you're a would-be borrower with CommunityLend, you sign up, then create a loan request by stipulating the amount desired, the interest rate you're prepared to pay and the description of your loan.
This loan request is then posted for auction online, and individuals who wish to be lenders bid for parts of your loan. When you receive enough bids to complete your loan, CommunityLend creates loan documents and payment arrangements between you and the lender, and the loan amount is moved to your bank account.
The loans are all personal loans, says Garrity, and can be used for purposes such as a car purchase, home improvement or refinancing credit-card debt. But you may also use the funds for a business, and the lenders can ask to see your business plan.
Martine Belanger, spokeswoman for the Financial Consumer Agency of Canada, a federal agency, warns that consumers should "do their homework" before using a peer lending website. "You have to be careful about providing personal information, such as your social insurance number and your credit score. How do you know if the lending service is legitimate?
"You're entering into a contract," she cautions, "and you should understand all the provisions of the contract - even have a lawyer review it."
Belanger says the agency does not condemn online peer lending, but is concerned that some borrowers, attracted by the social-networking concept, may accept interest rates that are actually higher than those they would be charged by a credit union or a bank.
(Sheldon Gordon can be reached at email@example.com)