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Unconventional Finance Firms Turn Up As Credit Tightens

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The Associated Press

Published: May 3, 2008

Scott Metzger wanted to start a restaurant-microbrewery in San Antonio, Texas. His credit was good. His business plan was sound. He should have had an easy time getting financing.

He didn't. After spending a year developing relationships with three large banks, he was abruptly denied financing in December.

The state of the national economy had soured, the banks told Metzger, and they were tightening loan standards.

Left on the hook for thousands of dollars, he turned to his credit union. His loans were approved within two weeks.

These days, small-business owners such as Metzger have to be creative about getting the money to start and expand. Many are turning to nontraditional sources, such as credit unions. Increasing numbers are going to online lending Web sites and to factoring companies, which buy companies' future revenues.

Factoring is enjoying a cyclical upturn that it often sees during economic downturns, while credit unions and online social lenders hope the uptick in their small-business lending volume survive.

But some of these alternative financers are more expensive than a traditional bank loan, or brand-new and largely untested.

Even as the Small Business Administration's main loan program gave out 17.6 percent fewer loans by early April than in the same period last year, online lending auction site Prosper.com has seen a big jump in high-quality borrowers and loan volume.

Credit-scoring agencies such as Experian, which Prosper uses, assign credit scores based on consumers' bill-paying history, debt and other data to determine how likely they are to repay a loan in time.

Prosper lent $81 million last year in an eBay-style marketplace, and expects to beat that number in 2008. Would-be borrowers choose their interest rate, which averages 7.8 percent to 15.6 percent for those with good credit. That's roughly comparable to the rates on unsecured loans for small businesses offered by Wells Fargo & Co. on its Web site and, chief executive Chris Larsen said, much cheaper than rates on business credit cards.

At least four Web social lenders have joined the marketplace within the past 12 months: Zopa, GlobeFunder Ventures, Virgin Money USA and Lending Club.

Peer-to-peer lenders such as Prosper and Lending Club match lenders and borrowers, while Zopa, an online social financer, is backed by credit unions, from which borrowers can pick a lender. Investors on Zopa can help out a borrower by buying a certificate of deposit linked to the borrower's profile, reducing a borrower's monthly repayment.

Online Banking Report estimates that loans given out by peer-to-peer online lenders could grow to as much as $3 billion in 2012 from $86 million in 2007. That number is still only a small fraction of the $14.3 billion guaranteed by the SBA in its 2007 fiscal year. .

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