Small Business Owners Turn To Friends For Money
MICHEL MARTIN, HOST:
We want to turn, now, to the world of small business and, when we reached out to you on Facebook, we found many similar stories. Here's John Schiffer(ph). He had a new idea for his business, YourChowHound.com, but he said that, since there was no precedent for a company like his, he couldn't get any funding.
JOHN SCHIFFER: If we were, say, buying a franchise or something that already existed, that would give the underwriters a track record to look at, but because we are new and don't have that and nothing comparable for them to look at, they can't assess the risk, so they won't assess the risk.
MARTIN: It turns out, he isn't the only one. We've been hearing over and over again that many prospective small business owners are still struggling to find loans. But it turns out that banks are not the only source of funding these days. There is a growing trend of people finding investors among their peers.
Here to talk to us about that is Roben Farzad. He is a contributing writer for Bloomberg Businessweek and he's with us once again from Richmond, Virginia. Also with us, Marjorie Perry. She is the CEO of MZM Construction and Management Company. That's in Newark, New Jersey.
Welcome to you both.
MARJORIE PERRY: Thank you.
ROBEN FARZAD: Thank you.
MARTIN: Roben, that clip you heard in the intro was pretty indicative of all of the messages we got on Facebook. Can you tell us why it's been so difficult for people starting small businesses to get loans?
FARZAD: The pendulum has really swung the other way from the era of promiscuous lending that we saw in the middle part of the last decade, where banks really made dumb loans and they paid for it and, ultimately, the taxpayer paid for it in bailing them out. And so, now, they're just being thrice bitten, twice shy and just not making enough loans.
I saw a stat that the ratio of loan to deposits for banks and thrifts is almost at a six year low and so it's this paradox where they're swimming in cash, swimming in zero yielding deposits, but they're still trigger shy about loaning it out.
MARTIN: Marjorie, you've been in small business since the early 1990s, so presumably, you've seen the pendulum swing all different kinds of ways. Have you experienced what some of the other people are telling us? I mean, even as an established business, is it more and more difficulty getting credit?
PERRY: Oh, absolutely. When we started, you know, friends and family - they had a few dollars so you could actually start a business from friends and family. I will say this - if you had a credit score of 650, 675 in the late '90s, early 2000, you could get a loan from a bank. Not a problem.
But, since 2008, the entire paradigm has shift, just as Roben had just mentioned a few minutes ago, so now you have to be a perfect score, one-to-one equity in whatever you're borrowing, so they have to have collateral one-to-one. So I have never seen a market quite so resistant to lending money, especially from a bank factory. So it's going to be interesting over the next few years how this is all going to shake out.
MARTIN: So it's almost as if you can't get money unless you don't need it.
PERRY: That's right.
MARTIN: Roben, you just got back from a small business conference and you said that there was kind of a trend there that you heard about, where there's an alternate way that people are getting funding that doesn't involve the banks. Can you tell us about that?
FARZAD: Right. I mean, in a past life, you know, if you meet - your Uncle Wilfred comes to you at Thanksgiving. He's on his third marriage. He's on his second personal bankruptcy and he's like, yeah, hook me up. I have this great business idea. And you're like, no way. And the bank won't give him the time of day, but now, you have, effectively, somebody cutting out the middleman of the bank that's just sitting on that cash or a new, more nimble middleman or these peer-to-peer lenders like Prosper and Lending Club, which will actually talk to Uncle Wilfred and say, give us your case. We'll run your credit score. We'll come up with an interest rate that you have to pay and, if the paperwork goes through, we'll put that deal out there and, if there is an investor who's willing to make you that loan for that amount, you at least get a loan and you don't have to go to a loan shark in Vegas.
And these companies - you look at Prosper, you look at Lending Club. They are just growing in leaps and bounds. I mean, they're nowhere near the size of the too-big-to-fail banks, but it's another example of the Internet disrupting something. You see Google do that with advertising. You've seen Amazon do that with retail, with book selling. You've seen Apple do that with music, and there are players out there who are realizing that we can come in and be more nimble. We could do some of the due diligence, some of the credit scoring in the middle and connect these two frustrated constituencies, borrowers and savers; savers who, after all, would be willing to look at a scenario where they could get seven, 10, 15 percent, depending on the risks they're willing to take in terms of helping borrowers that are shut out of the market.
MARTIN: Well, that was what I was going to ask, though, is why would someone - you can see why a frustrated small business owner or somebody who needed credit would be interested in this because you want somebody to look at you as a human being and you can say, OK, maybe my credit score isn't the best, but look at my track record. You know, maybe I went through a - you know, whatever. You know, I lost my job or my wife lost her job. I had a big medical issue. That's all now resolved. I want somebody to look at me as a human being and look at my potential.
MARTIN: But why would an investor be interested in this? Because you can easily see where somebody might say, well, gee, you know, if the big banks, with all of their credit scoring capability and all of their resources aren't willing to take a chance, why should I?
FARZAD: The big banks are heavily regulated. The small person out there is heavily frustrated and, if you look at bond yields, they're piddling. They're very low. You can't invest and get much in a corporate bond fund anymore that - these kind of Fortune 500 solutions. So you're looking for yield. You're looking for return and you're looking for return that's risk prudent. And if there's someone out there who's helping you do the due diligence, obviously, a person with a surplus of cash is not going to go out there and meet a person that she might loan money to and say, open up your books and let me see everything. The average man on the street with money is not capable of doing that, but you bring in a third party that is able to do that and, moreover, can put those in portfolios like these little mutual funds of great credit score people, of lower credit score people, but with higher yields, that disperses the risk for you and that adds a whole new element to the equation.
Again, to take it back to your Uncle Wilfred, it's not just, you know, you do or don't loan him the $20,000 for a risky venture.
MARTIN: Marjorie, can you see yourself on either side of a transaction like this? Can you see yourself getting credit through something like this, or lending? Can you see yourself investing in something like this?
PERRY: You know, I have been on all five sides. I'm going to say that for the record. Roben just made it real clear about what the Lending Club and Prosper.com is doing. At the end of the day, they're still treating the investors somewhat like a bank, so if your score is not 716, 712, making minimum of about $69,000 a year, 12 to 14 years' history so that they can look at - they're still going to look at you to make sure that you are a risk worth taking.
I say that it is a great program and a lot of companies are going that route. I'm going to hope that there will be another layer that's going to come up eventually because, sometime, say, for instance, someone does not pay you right away. The Lending Club will not be able to work with you in that particular category.
Now, right now, we're in a place where we can borrow from the bank or from a lending club. That's a good position to be. But small businesses are struggling in another direction now because if they can't get peer-to-peer, they're going below those kinds of really established lending clubs and they're starting their own so that they can continue to go forward, do what they have to do, etc., etc., etc.
And I'll give a good for instance; being New Jersey with Sandy. A lot of the loans couldn't happen because they couldn't pay their bills, so they automatically dropped below the threshold of what the lending clubs may be looking for.
So there's now a new group of lending clubs, you know, kind of behind the scenes no one knows about yet that are coming through. My business maybe - might lend $30,000 or $40,000. So we're even getting in a deeper layer of peer-to-peer to make sure that we can keep these companies buoyant and going so they can get through this tough time so they can get to the next level.
MARTIN: Marjorie, is that - when you consider lending like that, do you consider it in your interest as a business or do you consider it social lending? You consider it like investing in your community?
PERRY: It's a combination. We may not have the interest rate of a 10 percent. You know, obviously, I'm not set up as a lending club and some of the other businesses around me were not set up that way. But - yes. There will be some kind of return that we're expecting. We might say, this is only good for 30 days or 60 days versus a two or three year period. The more established lending clubs, peer-to-peer, can go two to three years, maybe even up to five years. We're not in the business to do this. This is just a short-term gap of lending, peer-to-peer, to make sure that these businesses stay buoyant.
MARTIN: Roben, before we let you go, just a final thought on this. Do you think this is the wave of the future?
FARZAD: I'm optimistic because we've all seen the disruptive ability of the Internet and you add to the element the fact that - you add to the equation the fact that the banks are so disliked right now and this is bound to catch fire. One of the dilemmas is: are you going to get big enough in terms of scale? It was like with the first time you used eBay. Could you trust it? Were there enough people out there ranking it, rating it? Did they have enough track record? And I believe they're about to pass that tipping point.
MARTIN: That was Bloomberg Businessweek contributing writer Roben Farzad. Also joining us was small business owner Marjorie Perry. She's the CEO of MZM Construction and Management Company out of Newark, New Jersey. We caught up with her in Springfield, New Jersey.
Thank you both so much for speaking with us.
PERRY: Thank you.
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MARTIN: Just ahead, does this sound like the place you work?
ROB STEIN, BYLINE: As I started feeling better, David started getting sick and then he was stuck at home for, like, three days, throwing up and everything, and then Keith went home sick. Jack was actually out before. Sorry, I missed one. Jack was out.
MARTIN: That's right. The flu. It's ravaging homes and offices around the country and I don't feel so good myself. We'll give you the lowdown on what you need to know about this season's nasty bug. That's coming up on TELL ME MORE from NPR News. I'm Michel Martin.
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MARTIN: Last year, singer/songwriter Emili Sande performed at the Olympics and took the top spot on the charts in the U.K. But even though her career has shot into the stratosphere, what she wants is simple.
EMILI SANDE: I want to write great music that people really connect with.
MARTIN: Soul sensation Emili Sande joins us for a special performance and conversation next time on TELL ME MORE from NPR News. Transcript provided by NPR, Copyright NPR.