JOBS Act Makes it OK to Tap Social Networks for Business LoansBecause most reporting on the JOBS Act has focused on how the new law will make it easier for "small" companies to sell equity and go public, truly small businesses might think there's nothing in the legislation for them. Stock and IPOs? Not on the radar of most Main Street businesses.
But a pioneering company called SoMoLend is leveraging an underreported aspect of the JOBS Act to help very small businesses raise money through debt financing. SoMoLend will help entrepreneurs to crowdfund small loans from people they know. Bakeries, bike shops, florists, hardware stores, and lawncare services are the kinds of businesses that stand to benefit.
Many entrepreneurs get their start with cash from friends and family. But until now, Securities and Exchange Commission rules kept them from advertising to solicit investors. The JOBS Act makes it legal to seek loans from, say, 500 of your Facebook friends or Twitter followers, and to pay them back with interest.
Cincinnati-based Candace Klein, a securities lawyer with a passion for microlending, started SoMoLend (short for Social, Mobile, Local Lending) in December, 2011. She describes it as a "version of a crowdfunding platform," like the popular Kickstarter.com, except hers provides debt-based financing instead of reward- or equity-based funding. Her patent-pending, peer-to-peer lending technology uses a web-based platform to match borrowers—including people who might not be eligible for traditional bank financing—with investors who are willing to loan them money.
Based on an extensive application process and a credit report, SoMoLend ranks borrowers' credit-worthiness with a five-star rating system, and underwrites the risk. No one is turned down, Klein says, but the loan amount, interest rate, and terms are based on a borrower's star rating.
"A five-star borrower has been in business five years or more, has a credit score of 800, and a low debt-to-income ratio," she says. But even a startup with no credit rating or even bad credit and a high debt-to-income ratio can seek a small loan—$1,000 for a one-star rating. Borrowers can improve their rating by repaying their loans on time through the SoMoLend platform, to become eligible for larger loans in the future.
SoMoLend interest rates are competitive with what a small business owner would get from a bank (if they could get a bank loan). For five-star borrowers, Klein says the rate is between 5 and 8 percent, with a five-year term. For one-stars, it's closer to 18 percent, paid back over six months.
The JOBS Act won't kick in until the SEC finalizes its enforcement rules next year. So, for now, investing on the SoMoLend platform is limited to banks, local chambers of commerce, municipalities, and accredited investors whom Klein has engaged. "The beauty of the JOBS Act," she says, "is that now we can roll this out to small businesses, churches, and neighborhood associations that want to invest in their communities, and let people raise money from their social networks."
Why bother with a platform like SoMoLend if your Facebook friends are already willing to put up the cash you need to start your pizzeria? Several reasons, Klein argues. First, the typical small business borrower is looking for only $18,000, but the average crowdfunding investor puts up $100-$500. "Imagine being a business owner trying to keep track of [180 $100 loans] and repaying each at different terms, different rates," Klein says. "Our platform keeps track of that. You make one monthly payment into the system and we distribute that payment to your lenders."
The platform also reduces risk for investors, Klein says. "We're underwriting the loan. We're telling the lender, 'based on a number of risk factors, this is the amount of interest that should be charged.'" She says the average rate of return for an investor is 10.1 percent. "They're getting a higher return than investing in high-yield bonds and they're investing in their own communities," she says.
Using a crowdfunding platform is also a way to eliminate emotion from of the payback process. Say your uncle and your mother both loaned you money to start your business. You see your uncle only at holidays and your mom calls you every day. You might feel pressured to pay one back before the other. The crowdfunding platform is an intermediary between borrower and lenders. "That's why friends and family lenders love this as well," Klein says.
Operating only in Ohio now, SoMoLend is readying to go national with tools that let prospective lenders choose the geographies, industries, and level of risk they're interested in. With the slogan, "connecting local businesses with local investors," Klein says it's "like an eHarmony for borrowers and lenders." With potential for some profitable marriages.