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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.

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.

Edition: May 2017

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