P2P Lending: Real People Helping Real Projects
As bank credit and government loans are getting harder to find for companies with promising ideas but no money, we may be entering a fertile era for peer-to-peer lending.
Peer-to-peer lending is the most basic financial concept you can find, and probably the oldest. It is the simple practice of lending and borrowing directly between individuals (“peers”) without the participation of a traditional financial institution.
For years, companies have turned to banks and VCs to get financing for their innovation. Since getting money from these guys is now harder than ever, following the meltdown of the financial system last fall, entrepreneurs have to look elsewhere for help. Sometimes, help is just down the corner.
Why couldn’t we just lend and borrow money from one individual to another, based on pure business plan quality, with no condition but a (small) interest rate? It doesn’t have to look like organized crime: the lender and its borrower can register their agreement in presence of a designated third party – who would be more of an observer than a bank – with the oversight of a government agency like the SEC.
Many P2P lending systems are possible. Some have been tried on the Web, with more or less success – you can find a list of these initiatives here. There’s still a lot of untapped potential in this field, especially now. For example, big social sites like Facebook could become powerful peer-to-peer lending systems. Or small-scale networks with privileged access could do the trick. Or some kind of Web-based feodal system.
Either way, the core principle stays the same. Why go to a bank or a VC when you can get help from a real person who’s going to judge you on your real potential instead of a set of restrictive guidelines based on cold-hearted self-interest?
From the lender’s point of view, we could get 2% for sure by placing our money in a savings account, but we can also bet on an exciting leader whose success will directly impact our community. We can even give him a hand if he needs some help.
P2P lending doesn’t necessarily have to be about hard cash. It can be about helping one another by exchanging sets of skills. A gift economy for entrepreneurs, if you will.
Law firms, for example, could help launch promising new projects by giving away legal advice: incorporation, intellectual property, etc. – all the expensive legal stuff you need when you start a company.
Instead of just serving the established big clients which are getting rare to find these days, law firms could participate in promising ventures from day one, putting their sought-after skills to an exciting use while helping young entrepreneurs flourish in their own community.
Lawyers could lend their advice in exchange of shares and privileges, the same way VCs do with cash, or they could just give it away for free with the promise of a long-term partnership based on trust. If one over 10 entrepreneurs they help hits the jackpot, they’ll have a big client for life – one who won’t get away at the blink of an eye, but will stay close through good and bad times, as old partners do.