Peer Power

Last fall, San Francisco's Samovar Tea Lounge was in a cash crunch. Co-owners Jesse Jacobs, 36, Paul Fullarton, 36, and Robert Sandler, 33, had recently opened a second store, putting a crimp in Samovar's bank account just when the company needed to order holiday merchandise. There wasn't time to get a traditional bank or SBA loan, and the interest on a credit card cash advance would have killed profits.

So Jacobs obtained two $10,000 loans at 10 percent, each in two weeks flat, on the peer-to-peer lending site Prosper.com. In the year since we wrote about Prosper's debut, the San Francisco company has facilitated $57 million in loans. It now has 260,000 members. Prosper co-founder and CEO Chris Larsen says small-business funding is one of the most popular borrower categories.

To get a loan on Prosper, borrowers fill out an application, are assigned a credit grade and post a pitch to lenders: how much they want, why they want it, and the proposed interest rate. One new wrinkle: Borrowers need a credit score above the high-risk zone to use the site. 

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Lending on Prosper has gotten easier with new analytical tools that calculate average interest rates and loan default rates, both broken out by credit grade. Lender Marc Block, a quality-management executive in Marlton, New Jersey, invested $2,000 through Prosper at an average 10 percent, including a small loan to Samovar.

The use of peer-lending sites is set to boom, experts say. Dan Schatt, a senior analyst at financial services research and consulting firm Celent LLC, forecasts that the peer-lending industry will facilitate $5 billion in loans annually by 2010, up from last year's $282 million. One Prosper rival, Zopa.com, is based in the United Kingdom and plans to debut in the U.S. this summer.