Trey Rumph was a successful pharmacist in Tennessee, but he had a dream: a party store. He sunk every dollar that he had into acquiring the property, but when it came down to buying balloons, masks and streamers, he came up a bit short. He tried to get a loan, but even for a man with his financial security, the banks were staying tight.
“I was buying a profitable business that more than met normal debt to income ratios required by Banks. My credit was over 750 but no bank was willing to do the financing.”
He decided to go around the community, but knocking on doors with a manila envelope didn’t seem like it was going to get the job done. He went to Rebirth Financial, a start-up financial service in New Orleans providing peer-to-peer small business loans, usually community-based. He raised his money in under two weeks.
Rebirth Financial was founded in 2008 as a response to the global financial crisis and the sudden vulnerability of the nation’s largest financial institutions. As small businesses struggle to start up or get back on track, they’re finding themselves going to lending wells that are looking dryer and dryer. But according to Rebirth CEO Chonchul Gupta, just because the banks are in trouble and the economy is weak doesn’t mean that people don’t need money.
With community loans, people know what they’re getting into. Rumph’s lenders knew him, trusted him and knew that they would shop at his store if he opened up. In the case of one New Orleans Brewery trying to raise the money to build a canning operation, local lenders could see something national banks couldn’t: people loved their beer, and were going to buy it in droves once it got into cans (they did).
“When I started out I thought that it would be people in California lending to people in Texas, but it’s not that at all,” says Gupta. “It’s people looking for good investments in their backyard. It’s like when we used to have local stock exchanges.”
Some of the other loans include a bus company in New Orleans, and a dating radio show in Chattanooga. With an average loan size at $80,000, the service deals with decent-sized operations. It’s a step up in scale from other peer-to-peer lending services like prosper.com, which deals with individuals instead of businesses.
With larger loans people need more information to work off of, and so Rebirth is also developing a rating system for their lenders and borrowers like the S&P does for large institutions and countries. The goal is to have a completely self-sufficient lending system without large banks or financial institutions.
Gupta sees the rating system as a way of leveling the playing field for new businesses.
“If you’re a small business and you don’t have an established credit history, maybe you haven’t registered with Dunn and Bradstreet, and you don’t have ways in which financial institutions can look back and see your history, you’re petty much taken out of the game.”
With big banks looking frailer than ever, it’s no surprise that they’re getting tighter with their purse strings. As the internet makes these sorts of deals easier than ever, peer-to-peer lending may become a more and more viable alternative from big deals to small.
“The worse the economy gets, and the worse the banking industry gets, the better it’s going to be for peer lenders,” he says. “Because people need money. You’re going to see a boom of good, pure alternative finance.”