International Financing For Home-Based Business

by Yank Elliott, MBA & IAHBE Staff Writer

 

This article is the result of an inquiry from an IAHBE reader in Bermuda. That’s the lovely island accidentally discovered by an off course English ship laden with supplies for my first North Carolina colony which apparently failed to survive. Bermuda’s good fortune was North Carolina’s bad luck. This reader replied to the resource block at the end of my articles with the question, “Are there any international sources on the Internet that finance home-based businesses like Prosper.com in the US?”

I hope the reader will see this article, because my e-mail to her was caught in the SPAM trap set by her ISP. I can’t communicate with her, probably because my e-mail address is “globalbiz.” But here is the answer to her question. Bermuda is a British Overseas Territory, so she should be able to use the sources discussed later under “UK Sources.”

The kind of lending my reader asked about is now known by several names like “people to people (P2P),” “peer to peer (also P2P),” “social lending,” and similar terms. Early in my research it was obvious there are no international small business lenders on the Internet. What you have is a growing number of P2P networks in individual countries. Groups like these are subject to local legal regulations, and this is probably why they don’t operate across country borders. Some of them have separate groups in a few different places.

This idea of helping people to help themselves seems to have originated in a small village of Bangladesh in 1976. The idea came from Muhammad Yunus as a way to serve the rural poor in Bangladesh, one of the very poorest countries in the world. For his foresight, Professor Yunus was awarded the Nobel Peace Prize in 2006. He called the operation “Grameen Bank,” which is now a formal bank, 95% owned by its borrowers who are almost entirely women. It still serves the rural poor in the country, requires no collateral, and there are no legal documents of any kind.

Recently Grameen established a special program for beggars, the last income resort of many poor people. The group includes disabled, blind, mentally retarded, and other unemployables. This new group numbers more than 103,000; they have borrowed a total Tk. 116,123 of which repayments already total Tk. 82.36. Grameen also makes micro-enterprise loans to the more prosperous among the poor; the largest loan to date is $17,500 USD.

Though Grameen has never served people outside Bangladesh, the idea spread around the world and formed the basis for what is now a widespread group of micro finance institutions (MFIs) making small local loans to help poor people support themselves with their own business operations.

Now here comes the closest thing there is to an international Internet lender; Kiva does not lend worldwide but it does accumulate small loan amounts from everywhere and then lends them through associated MFIs. The founders of Kiva were overwhelmed at the thought of three billion people existing on less than $2 USD per day; they came up with the idea of providing a way to accumulate very small amounts from many lenders and put these funds in the hands of cash-strapped entrepreneurs in the developing world.

Since launching in October 2005, over 90 MFIs in 43 countries have raised 0% interest debt capital from more than 316,000 social investors via Kiva. Kiva partners with highly reputable MFIs across the globe such as the ones listed at Mix Market. Kiva is the first social investment organization to partner with Micro Finance Institutions around the world.
Micro finance is basically the act of lending money to poor people who have no other sources. On the Kiva site, click the “Lend” tab and you can see all the little businesses in every country and what they do. The site also show how much money they need and what percent of funds they have raised to date. If you want to participate, decide on an entrepreneur and then set up your account if you have not done so. You can follow the progress of each $25 loan you make. No interest is paid to you, the lender; you may lose all your money. When the loan is repaid you may lend again, donate to expenses of Kiva, or withdraw your funds. All transactions are through PayPal because they provide money transfer services worldwide for free.

Many other companies support Kiva with advertising and other free services. These include Google, YouTube, Lenovo, and a lot of others you can see by clicking “Supporters.” The “Journals” tab shows a current description of the activities of all entrepreneurs. Loans may be made through PayPal from anywhere in the world that PayPal is available.

Micro finance is not the entire solution to poverty, but it is a significant strategy toward building micro finance institutions into a stable and profitable position that may begin to attract larger banks to the industry. The greatest success story supporting this outcome is Grameen Bank, discussed above.

The first company to develop the social lending P2P idea was Zopa, the world's first lending and borrowing marketplace. By demonstrating that social lending works on a large scale, Zopa has changed the Internet financial sector for good. In Zopa's wake, copycats—such as Prosper in the US, Smava in Germany, and Boober in the Netherlands—have sprung up across the world. Following is a country by country discussion of what P2P groups are available to help you in your location. There are a number of groups trying to start. When searching for them, you will see terms like “coming soon,” “site under construction,” “temporarily unavailable,” and similar expressions. They all mean the group is not yet in operation, so we will only discuss those available now.

The first US P2P to copy Zopa’s idea was Prosper.com. This is how it works. Anyone who is a U.S. resident with a credit score of at least 520, a bank account, and a social security number may request a loan on Prosper.. After passing Prosper's identity verification and anti-fraud checks, borrowers can request unsecured loans from $1,000 to $25,000 at rates they select. Borrowers can request 3-year unsecured loans up to $25,000. There are no prepayment penalties for repayment in full at any time. Prosper has instructions about how to create an attractive loan listing. Because there is no collateral loans are based entirely on credit grades and other factors listed in the loan request. If the listing is successful, funds are normally available in two to seven days.

Prosper is a marketplace for credit that enables people to lend money to other people in a safe, efficient manner. It is a throwback to times when people formed communities to lend money to those needing it. Prosper’s communities are able to encourage their members to make all payments as agreed; reducing defaults also reduces interest rates charged to members of the community.

Prosper allows borrowers to request loans up to $25,000 by posting listings indicating the amount they want to borrow and the maximum interest rate they wish to pay. Lenders search for and select these listings based on the borrower's credit history, debt profile, and other factors. Lenders bid on listings by indicating a minimum rate they are willing to accept. When a loan is matched between borrower and lender, Prosper handles all of the tasks needed for payment and collection of the loan.

For the safety and security of the Prosper marketplace, it is important that Prosper makes every effort to ensure that all individuals participating in the marketplace are real persons and the same person they say they are. To do this, Prosper is careful to verify the identity of all borrowers and lenders. When you create a listing as a borrower or open your account as a lender, your identity will be verified against data from credit reporting agencies and other identity and anti-fraud verification databases. You will be required to provide your name, date of birth, Social Security number, address and telephone number. Based upon this and other data, Prosper will verify your identity.

You can learn everything there is to know about Prosper by clicking the “Help” tab which takes you to a full page of “Help Topics.” Click the Frequently Asked Questions under “Getting Starting” and you should find just about all you want to know about Prosper. There is a glossary of terms and an etiquette section telling how you are expected to act when dealing with others in the group. There is a large group of titles about Borrowers as well as another large section covering Lenders. Study this Help area and you will be very confident in your dealings with the Prosper community.

In addition to Help Topics there are these in-depth aids to help you with specific questions you may have:

For borrowers, there are several tours showing how to list your project and what to do to secure the interest rate you want.

There are tutorials for lenders showing how to assess risk and how to bid on attractive rates.

Prosper lenders like groups because they are able to exert pressure on members to pay as agreed. There are tutorials about this important Prosper area, as well.

Now, here is Zopa in the US several years after Prosper. Zopa started the idea of social financing known as People to People (P2P) in 2005 in the UK. The idea has been copied by many others, some discussed in this article.

Borrowers may apply for a Zopa loan if they are a US citizen over 18 with at least $2,000/month income. Those eligible can borrow up to $25,000 for five years with no repayment penalty. There are no fees to apply.

Zopa is a little different about lenders. You must become an investor purchasing a CD for at least $500. These are backed by a number of credit unions and insured to $100,000. The interest rate to you is currently 3.75%. To invest this way, you must be a credit union member; Zopa says they can sign you up as a new member online to enable your participation as an investor. This can be a real advantage for you, in the role of a borrower, because Credit Unions are known for good deals to their customers.

The normal Zopa unsecured loan rate is 8.49%; you can get an even lower rate by referring people to invest in CDs in your behalf. This is because every new CD attributed to your efforts pays some percentage toward lowering your rate; this includes YOUR ENTIRE INTEREST AMOUNT, if you provide enough new CDs. Pretty good deal and a great incentive for borrowers to refer investors.

A Google search for Canada shows no currently active lenders, but there are two or three in the process of offering P2P services in the near future.

The UK was the birthplace of Zopa social lending. The founders put together a way for borrowers and lenders to help each other, bypassing banks and other middlemen so the borrower gets a lower interest rate while the lender gets higher rates. Everyone wins. Here is the Zopa UK Website. ZOPA stands for Zone of Possible Agreement—it’s the edge between the lowest one person is willing to get for something and the most someone else is prepared to give. Zopa has credit licenses from the Office of Fair Trading and is registered at the Office of the Information Commissioner. Zopa UK, being the birthplace of the idea, works just like Zopa US, except for some possible differences in government regulations.

In just the last month, Zopa UK announced it will be launch the Young Markets program. This is a marketplace specially created for young borrowers aged 20-25 years old, who often struggle to get approved for unsecured loans. This is not usually because they have any record of bad debt, but more often because they don’t have any debt history good or bad. Unlike other loan companies, Zopa won’t penalize a borrower just because they’re young. If their employment and income checks out, Zopa gets them financial help they need during their early careers from lenders who are prepared to take a little more risk for a little more return. Zopa attracts a great many of these borrowers; 28% of all applications over the last 12 months have been from those in this age bracket, but until now, less than 5% of them have been approved. Zopa expects to have this program fully functional for borrowers and lenders in the UK by the end of July.

P2P online lenders in Europe include these (I have a language problem here so there is little description):
In Germany there is Smava.

In The Netherlands you have Boober.

Zopa is available in Italy. It should work pretty much like Zopa in the US, perhaps without the credit unions. Home-based entrepreneurs in Italy could use this source of funds to promote their businesses.

Moving on around the world there are several social lending groups trying to come online in Australia, but the first appears to be iGrin. At this writing, they have 1806 users and have made total loans of $168,940 AUD. Lenders and borrowers must be Australian citizens over 18 with a bank account. Lenders may invest amounts as small as $100 AUD up to $25,000 AUD. Borrowers can request loans of $1,000 AUD to $25,000 AUD for up to three years. Lenders review loan requests and bid on portions of many loans that are attractive to them; this spreads the risk to the lender. There are no fees to register but fees begin for borrower and lender when a loan request is funded. The name, iGrin, comes from “internet group investor network.”

There are a number of P2P lenders trying to start online in Canada, Japan, and India. These loans are available for many good purposes other than business, like personal loans or home improvements. These groups enable many deserving people to get needed financing when all other sources are closed to them.

If you are in a country we haven’t covered, chances are someone is trying to start P2P in your area. Keep yourself posted so you won’t miss your opportunity.

---

Yank is a home-based entrepreneur and freelance business writer living in Hurricane Alley, North Carolina, USA. His Website is http://www.alternate-choice.com and you may contact Yank at mailto:newideas@alternate-choice.com.