The small business lending space just got more interesting. Funding Community launched last week with the promise of bringing together local businesses and investors.
Small Business Lending for (Almost) Everyone
Great, you may be thinking, another opportunity for accredited investors. No. The tagline for Funding Community is “where anyone can lend to a small business” and as its name implies it is taking a true community approach to small business lending. Funding Community is open to all investors (they call them lenders) in every state except ND, PA, SD, TN, WV and WI.
How is this possible? Alex Binkley, the CEO and co-founder, has found a way around the expensive S-1 registration requirement that has been a prerequisite for companies looking to compete directly for investors with Lending Club and Prosper.
Before you jump to conclusions and think that Alex Binkley is crazy let me share with you some background. First, Alex is an attorney who used to work for the prestigious law firm of Wilmer Hale. He has examined the securities law surrounding p2p lending in depth. He has also sought dozens of legal opinions on this matter and he is comfortable with his interpretation of the law.
While he won’t give away his secret sauce it does have something to do with an exception created by a Supreme Court ruling that allows for certain types of short-term business loans in small amounts. The maximum loan amount at Funding Community is $10,000 and they are all nine-month loans.
How It Works
Anyway, on to his business model. Funding Community is all about connecting local businesses with the investors who love them. Unlike most lending platforms, Funding Community encourages its borrowers to not just apply for a loan but to use the loan as a marketing vehicle. That is why you will see most of the loans on the site with some additional benefit for lenders.
For example, right now there is a fitness company looking for a $3,500 loan. If you lend money to this borrower you will also get two free personal training sessions. Quite compelling if you happen to live in New York and are looking for a trainer. Similarly, a custom clothing company is offering a 20% discount on shirts for lenders who provide money for their loan.
But this is not like Kickstarter where it is all about the gifts you receive. Lenders will also receive a return on their money. The rates are much lower than you might find at other sites because their hope is that lenders are looking for more than just a financial return. While anyone can lend, they expect most of the lenders will be connected in some way to the businesses obtaining the loan.
Secured Business Loans
Even though you won’t see any mention of investor returns on their site, Funding Community is very serious about providing a good experience for lenders. They have a security interest in the assets of the business and every loan has a personal guarantee from the founders. The expectation is that this will lead to very low default rates. But obviously there is still risk involved which Funding Community details on their site.
They are also very much focused on the small lenders. The maximum amount anyone can lend is $1,000 per loan, so this will rule out interest from almost all institutional investors. The minimum investment is just $25 per loan.
They are starting off in New York (for borrowers) and hope to expand to California later this year and then continue to other parts of the country. Their plan is to grow methodically one community at a time.
It will be interesting to see how Funding Community goes. They have a truly unique model, focused on community as much as finance. Their biggest challenge as I see it will be achieving scale. They do have the advantage of being a part of the largest local community in the country, being based in New York. So if they can make it there…they should be able to make it anywhere…
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.