Frustrated by historically low interest rates, small investors are finding that traditional financial institutions are unable to provide them with satisfactory levels of income. What if people could easily find qualified borrowers and make their own loans directly?
They could earn much higher levels of interest than they could with a traditional bank and have some control over where their money goes.
Banks typically serve as a middlemen in financial transactions. They pay depositors a minimal amount of interest on their accounts and then lend the money at much higher levels of interest to their borrowers. The difference between the two rates of interest is profit.
Prosper.com offers a matchmaking service between prospective lenders and borrowers. Lenders can screen borrowers based on personal narratives, needs, and credit quality. All loans use a fixed payback period of one, three, or five years. After the initial match, Prosper administrates each of the loans – including payment collection and record keeping for an annual service fee of 1% (payable by the lender). It is worth noting that Prosper is not registered as a bank and loans made through the service do not receive the benefit of FDIC insurance.
So far, Prosper has matched $300 million in loans between over a million participants. Borrowers with excellent credit histories are currently paying annual interest rates of over 5%, while at-risk borrowers looking to consolidate credit card debt are paying over 20%. In order to limit risk, many lenders at Prosper set up diversified loan portfolios. Individual loans can be for amounts as small as $25. This greatly minimizes exposure to loss in case any of the individual borrowers fail to make their monthly payments.
With Prosper and similar services such as Lending Club, banking becomes a better experience. Peer-to-peer lending puts people in touch with what their money is doing. Borrowers, meanwhile, realize that their payments aren’t going to a large corporation, but to real people who are depending on them.
The next big opportunity for peer-to-peer funding is venture capital.
Until very recently, it has been illegal to crowdfund small positions for equity stakes in new businesses within the U.S. The JOBS Act (an acronym for Jumpstart Our Business Startups), signed into law just last month, removes decades-old legal prohibitions against public advertising of private equity offerings and makes it possible for non-accredited investors (i.e., <$1,000,000 net worth or $200,000 annual income) to invest in venture capital.
The SEC still has several months to amend its rules to reflect these new changes in the law. Once this happens, though, we'll see a revolution in the world of angel funding and venture capital. Soon it will be possible for small investors to get in on the ground-floor of many more new businesses well in advance of their first IPO. This is good news for everyone - investors, entrepreneurs and anyone else who relies on accessible capital markets.
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This is my last posting for the next few days. I will be taking my office apart so that we can move to our new apartment downtown next Tuesday. I will be unplugged and disconnected except by tablet. Expect me to be back in the saddle before the end of next week probably in time to provide you with some more headlines. In the interim these are the stories I share with you this week:
Today, literally thousands of alternative transportation vehicles are coming out of the woodwork and they nearly all have the same problem – no place to drive them. Most are banned from biking and hiking trails, and they are neither licensed, nor licensable, for use on the streets. I’d like to discuss some new possible solutions and why Colorado is poised to take the lead in the alternative transportation marketplace.
In a recent conference promoting not only their latest gizmos but their company's animating vision as well, Google executives declared they were working toward a future in which technology "disappears," "fades into the background," becomes more "intuitive and anticipatory." Commenting on this apparently "bizarre mission for a tech company," Bianca Bosker warns that their genial and enthusiastic promotional language masks Google's aspiration to omnipresence via invisibility, an effort to render us dependent and uncritical of their prevalence through its marketing as easy, intuitive, companionable.
Occasionally during meetings one of my staff – an avid birder – will elbow me and I’ll look up and glimpse a bald eagle. Each time, I am in awe. I live in Washington State, which is home to a plethora of eagles, where pods of Orca ply the waters near the San Juan Islands, and where roads are sometimes blocked by herds of elk.
In this month's Report on Business Magazine, a supplement that comes with The Globe and Mail, one of Canada's national newspapers, Stanford University's Mark Jacobson provides a best case scenario
According to The Hollywood Reporter, celebrity tech CEO Peter Thiel is upset that movies like The Matrix and Avatar make technological innovation seem "destructive and dysfunctional."
A team of researchers are asking the public to help them locate and count all the sources of CO2 coming from power plants on the planet.