Sunday, July 29, 2007

Using P2P lending to fund a startup

Most agree that web has significantly reduced the cost to start a new business. Paul Graham has written a great series of essays on how to start a startup with great information on funding. In his essay How to Fund a Startup he said that he started his company, Viaweb, with $10,000 from a friend. Excite founders borrowed $15,000 from their parents. The more traditional route is to look for angel investors, seed funding firms, or venture capital funds.

One question you have to answer is how much money do you really need? Prosper has raised $40 million in venture capital but we see several possible competitors (1, 2, 3) attempting to build a "Prosper clone" for less than $5,000. One big disadvantage of seeking funding from outside is that it is very time consuming. This is time that you could be using to build the company. In the Hacker's Guide to Investors, Graham said, "Raising money is a huge time suck at just the point where startups can least afford it...Investors have no idea how much they damage the companies they invest in by taking so long to do it."

Seeking funding through a lending site like Prosper could be a great way to shortcut startup funding. Funding can be obtained in days while it might take weeks or months through more traditional means. Of course, you are limited to $25,000 but that is about what most web-based startups need.

Today's Wall Street Journal has an article about using peer to peer lending sites to fund startups - Making the Most of Online Matchmaking for Small Firms. The article is focused on Go Big, a site that launced last year, which is described as "a dating site for start-ups, where entrepreneurs can create profiles and post ads looking for investors and others to help start their businesses." Prosper is also mentioned, "Several lender-borrower matchmaking sites have popped up in recent months. Like Go Big, and are designed for small companies seeking a cash infusion. focuses on individuals looking for money." Wil Schroter, who founded Go Big says, on his site "there are 99 companies looking for funding for every investor."

While borrowing on Prosper can reduce the time required to get funding, it is a loan which you have to pay back. The benefit is that you retain full ownership of the company. You will, however, have to start monthly payments right away. A $25,000 loan at 12.76% interest (average interest rate for AA credit grade for a loan that size), for example, will have payments of $839/month. If you have no positive cash flow or means to repay the loan you risk defaulting. Also, if you do not have good personal credit it is very difficult to get a large loan on Prosper.

One advantage of funding a loan through traditional means is that the investor may be well connected and can assist in other ways besides just the funding. The same may be true on Prosper on a smaller scale. It is possible that some of the lenders on your loan will take a personal interest in helping you succeed and may offer advice.

Borrow funds on Prosper here.


Anonymous said...

While I am not advocating to fund a startup through a p2p loan, I wanted to point out that, if you take that route, you are not neccessarily limited to $25000.
You could take out loans at several p2p lending sites simultaniously. Bear in mind that these are personal loans and therefore will impact your personal credit grade.

Claus lending news

Tom said...

Good point. I know someone that started their business by applying for and maxing out several credit cards. While I wouldn't advocate it, his plan did work and he is very successful now. A P2P lending option would have been better than credit cards - lower interest and longer repayment plan.

Samantha said...

Startup new business is easier than it before, if you planning to start a new business but having a bed credit history. No problems need cash
Ref: Fast Business Loan for easy funding.