Mari Alstin knew the $10,000 she had in savings and credit wouldn't be enough to open her women's clothing boutique. To cover the cost of rent, a security deposit, displays and inventory, she needed an additional $15,000--fast. Waiting on a bank loan was out of the question, and her credit card limit wasn't high enough to cover her expenses.
The Philadelphia-based entrepreneur had previously used the peer-to-peer lending website Prosper to finance a home-improvement project and consolidate her credit cards. On the site, anonymous users raise money from anonymous investors, Kickstarter-style. Depending on a borrower's creditworthiness and other factors, interest rates can run from about 6.5 percent to nearly 36 percent. Despite this, Alstin had no trouble paying off her two previous Prosper loans. So she decided to give the site a shot for funding her business.
In May, one week after posting an anonymous description of her entrepreneurial project on Prosper, Alstin raised the full $15,000, and the cash was deposited into her checking account the next business day.
Roughly 14 percent of the money raised from the site is used for small-business capital, according to chief marketing officer Brad Lensing. But unlike traditional business lenders, "we are underwriting on their personal credit information, not based on the business itself," Lensing says. "It's a personal loan."
Why did you decide to raise capital this way?
I needed something that was quick, easy and guaranteed. It was all about timing, because I didn't want the place that I wanted to lease to be given away. I knew the turnaround time would take longer with a bank loan. I knew that my chances of getting a Prosper loan were very good because of my repayment history.
How many investors did you find?
It was quite a bit, like a hundred-and-something investors. People can invest anywhere from $25 up to any amount they choose. So I had some people who invested $2,000; I had some people who invested $25.
How does the process work?
Prosper has a whole rating system. Basically, you put all of your monthly bills on there, and you put your income on there--without saying your name or giving any specific information about yourself. [Prosper requires personal information, but it is not visible to potential investors online.] Then investors look at your profile and see the rating that Prosper has given you based on your ability to repay, your debt-to-income ratio, as well as if you've borrowed money from them before. So they have a great amount of information before they decide to invest.
What are the loan terms?
The term of the loan is for six years. The interest rate is pretty high; it's about 26 percent. I pay $450 a month. When I took money out from Prosper before, I tried to pay my loans off within a year. But because this loan is a little more, it may be a year and a half. But I definitely won't go the whole term of the loan to pay it off. There's no penalty for paying it off early.
Is the access to quick cash worth the high interest rate?
I wouldn't have taken out a loan with high interest without knowing that I can repay it, because if you're paying that interest rate for six years, yes, it's ridiculous. But if you're paying that interest rate for a year and a half to be able to buy something that you've always wanted to do and that you've been very passionate about, to me, it absolutely worked.