Money: Green Person-to-Person Lending with Prosper

Interview with Chris Larsen, Co-founder and CEO of Prosper

Like everyone, green businesses need money to start and grow their business, but the credit crunch can leave even credit-worthy small businesses high and dry.  Person-to-person lending might provide a viable alternative.

Launched in early 2006, Prosper has already helped to mediate over $170 million in loans, growing swiftly.  Borrowers get an alternative source for loans, particularly valuable today, and a lending source that sees them as more than just a credit score.  Lenders get the opportunity to bid on loans and earn a higher rate of return than they might on a CD or in a savings account, as well as the opportunity to help borrowers working on causes they believe in like going green.   

Green entrepreneurs looking for money for their business might find Prosper a valuable resource.  A survey of Prosper lenders found that 25% have bid on loans for green projects and 93% of lenders are interested in lending for such projects.  This can include green projects for homes or loans for green businesses.  One limitation in making energy efficiency projects for homes happen is often that people don’t want to spend the money up-front.  A Prosper survey of consumers found that the majority of people are interested in energy efficiency and other green projects, but 71% are held back by the cost.  Having a financial resource like Prosper available can help businesses working in energy efficiency or other green business areas move projects forward with their customers.   

While looking into Prosper, I had the opportunity to talk to a green entrepreneur who has worked with their system, Michael Arquin, the founder and director of the KidWind Project (www.kidwind.org), producing kits for kids and teachers about wind turbines and other forms of renewable energy.  Started just five years ago, KidWind has “tripled in size every year”, and now has 10 employees.  When the time came to develop some ideas for new products, Arquin needed an injection mold.  Comparing what a bank had to offer with Prosper, he found that Prosper added better rates, and helped him to advance his company.   

Interview with Chris Larsen - Co-founder and CEO of Prosper 

August 21, 2008, Interviewed by Glenn Croston 

Glenn Croston (GC): Can you tell me how Prosper works? 

Chris Larsen (CL):   Prosper is a person-to-person lending marketplace; it’s really like an eBay for lending.  Any borrower with any need for loans can make a loan listing, revealing as much or as little as they want, and lenders bid for loans. When a listing goes up, anyone with $50 or more can bid to lend money. Bids with the lowest rates are combined into one simple loan.  Right now we have over 2000 active loans, which is pretty typical. Our loans are three year loans, fully amortizing, and borrowers can have two active loans at one time.   

GC: How does Prosper specifically apply to green entrepreneurs? 

CL:  With a green business, the interest of lenders is both economically based, and also based on interest in what the green business does which makes the loan more interesting.  People funding loans like these are considering the social and environmental impact in addition to the financial impact.  Green listings have been pretty popular, and our survey of lenders found that an extremely high percentage of people would consider the green aspect a big plus, making them likely to bid on those types of listings.  Green projects can monetize the fundamentals of what they want to do.  A bank, on the other hand, won’t usually consider the green aspect of what a business wants to do.   

GC: Do you see loans for green home projects like remodeling? 

CL:  Absolutely, and these do really well.  This includes energy efficiency projects, which are really attractive because these investments pay for themselves with reduced energy costs, and because lenders like green projects.  One possibility is working with energy efficiency businesses to provide funding for their clients. 

GC: How do lenders find and examine loan requests? 

CL:  To find loans, lenders can search for key words in the title or description.  About 25% of loans are small business oriented, and these involve the personal credit rating of the person who runs the business, not a business credit score.  The listing includes more than just the credit score though.  When a listing gets made, most small business people will add links, maybe a simple business plan, and they will show off with pictures to try to engage people.  Engaging lenders is important for the borrowers because it helps increase the chances of getting funded and at a better rate, improving your economics. 

GC:  What is the profile of the lenders? 

CL:  Our lenders vary dramatically, including some who lend larger amounts in the system to someone who has a few thousand dollars, something the average American can get involved with. 

GC: Are people starting small new businesses often loan customers? 

CL: We definitely see a lot people starting new businesses but it’s certainly not limited to this segment .  In the credit crunch the financing spigot has been shut off so that even more established businesses are having trouble.  Prosper is one of the few remaining open channels; plus you can get a better rate with Prosper as well.  The big trend is that more credit-worthy people are coming to Prosper now because banks are in some cases just shutting off all customers.  In the credit crunch it’s not that the people are becoming risky.  It’s really more of a bank problem than a people problem.   

GC:  Beyond a credit score, how do lenders connect with borrowers to get a better feel for who they are when making a loan?  Do lenders and borrowers know each other? 

CL:  Not usually, but it’s becoming increasingly common for friends to help borrowers they know.  Borrowers can invite friends to give a recommendation and bid to fund a portion of the loan, and even bids as low as $50 can have a powerful impact on others who don’t know you because they can see this friends and family are participating too.  Those listings typically have a much better chance of getting funded and at a lower rate compared to those who don’t have people they know bidding on their listings.  Getting a friend or two involved is a powerful help. One way that lenders get to know borrowers is that registered lenders can ask questions of borrowers to better understand what they are doing.  We get a collective underwriting of many lenders on each loan, and with 40 lenders involved the risk is spread out for lenders and there are a lot more eyes looking at it from every angle. 

GC:  How do you ensure the identity of borrowers? 

CL:  One of our biggest jobs is making sure it’s a safe marketplace.  We have state of the art technology to see if borrowers are who they say they are, including ID checking, credit checks, and strong procedures to prevent ID theft.  We have a 100% identity theft guarantee, meaning that if someone manages to obtain a loan on Prosper using a stolen identity, Prosper will repurchase the loan and reimburse lenders for the outstanding principal balance amount. 

GC:  Will Prosper be able to facilitate larger business loans in the future?   

CL:  The $25,000 limit on loan size is the current situation, although this might go up in the future.  We have found this is the sweet spot for us to replace credit card debt, a good spot for us to start out.   

GC:  How is business?  I understand that you’ve seen business grow during the credit crunch? 

CL:  It actually helps us, because we are the alternative.  We don’t have any of the problems banks do with capital right now.  We are seeing better credit quality folks – people who previously could get financing anywhere –  coming to Prosper because of the credit crunch.  We are really bullish on this business, where we see the competition and the opportunity as the trillion dollar credit card industry. 

That is a big opportunity for future growth for Prosper, and a big opportunity to help green entrepreneurs realize their dreams along the way.  You can find more about Prosper, and join as a borrower or lender, at their website: www.Prosper.com