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Funding Community Brings Local Business Lending Online

by Peter Renton on May 17, 2013

The small business lending space just got more interesting. Funding Community launched last week with the promise of bringing together local businesses and investors.

Small Business Lending for (Almost) Everyone

Great, you may be thinking, another opportunity for accredited investors. No. The tagline for Funding Community is “where anyone can lend to a small business” and as its name implies it is taking a true community approach to small business lending. Funding Community is open to all investors (they call them lenders) in every state except ND, PA, SD, TN, WV and WI.

How is this possible? Alex Binkley, the CEO and co-founder, has found a way around the expensive S-1 registration requirement that has been a prerequisite for companies looking to compete directly for investors with Lending Club and Prosper.

Before you jump to conclusions and think that Alex Binkley is crazy let me share with you some background. First, Alex is an attorney who used to work for the prestigious law firm of Wilmer Hale. He has examined the securities law surrounding p2p lending in depth. He has also sought dozens of legal opinions on this matter and he is comfortable with his interpretation of the law.

While he won’t give away his secret sauce it does have something to do with an exception created by a Supreme Court ruling that allows for certain types of short-term business loans in small amounts. The maximum loan amount at Funding Community is $10,000 and they are all nine-month loans.

How It Works

Anyway, on to his business model. Funding Community is all about connecting local businesses with the investors who love them. Unlike most lending platforms, Funding Community encourages its borrowers to not just apply for a loan but to use the loan as a marketing vehicle. That is why you will see most of the loans on the site with some additional benefit for lenders.

For example, right now there is a fitness company looking for a $3,500 loan. If you lend money to this borrower you will also get two free personal training sessions. Quite compelling if you happen to live in New York and are looking for a trainer. Similarly, a custom clothing company is offering a 20% discount on shirts for lenders who provide money for their loan.

But this is not like Kickstarter where it is all about the gifts you receive. Lenders will also receive a return on their money. The rates are much lower than you might find at other sites because their hope is that lenders are looking for more than just a financial return. While anyone can lend, they expect most of the lenders will be connected in some way to the businesses obtaining the loan.

Secured Business Loans

Even though you won’t see any mention of investor returns on their site, Funding Community is very serious about providing a good experience for lenders. They have a security interest in the assets of the business and every loan has a personal guarantee from the founders. The expectation is that this will lead to very low default rates. But obviously there is still risk involved which Funding Community details on their site.

They are also very much focused on the small lenders. The maximum amount anyone can lend is $1,000 per loan, so this will rule out interest from almost all institutional investors. The minimum investment is just $25 per loan.

They are starting off in New York (for borrowers) and hope to expand to California later this year and then continue to other parts of the country. Their plan is to grow methodically one community at a time.

It will be interesting to see how Funding Community goes. They have a truly unique model, focused on community as much as finance. Their biggest challenge as I see it will be achieving scale. They do have the advantage of being a part of the largest local community in the country, being based in New York. So if they can make it there…they should be able to make it anywhere…

{ 23 comments… read them below or add one }

Ray May 17, 2013 at 5:55 am

Peter, this is interesting.

Are you going to toss any money their way? I see potential in this.

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Peter Renton May 17, 2013 at 8:00 am

Yes, I am an investor and have loaned money to three businesses.

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Bryce Mason May 17, 2013 at 6:51 am

Count me in when the time comes for LA. Peter, do you know if they plan to share their loan data? Something exciting happens every day in this space!

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Alex Binkley May 17, 2013 at 8:05 am

Hi Bryce – This is Alex Binkley, CEO of Funding Community. I promised Peter I would jump into the comments today! We are available for lenders in CA today and just in case the interest rates are a little low for your taste (though with our security interest in the borrowers’ assets, we believe they reflect a decrease in risk from consumer loans), three of our local NY borrowers (including ourselves) have rewards (discounts and credits) that can be redeemed online.

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Alex Binkley May 17, 2013 at 8:42 am

I forgot to respond to the question about loan data – we anticipate publishing similar data to others in the industry, but it may take us a little time to put that in place.

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Anil @ PeerCube May 17, 2013 at 8:10 am

Sounds intriguing. I will have to check them out. Is it a loan to business or person? Is loan secure against business assets? Also, how much info FC require about business?

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Alex Binkley May 17, 2013 at 8:39 am

Hi Anil – We only make loans to small businesses and those businesses must be properly organized / incorporated in their state. In addition to our personal guarantee, we also have a security interest in all of the business’ assets (not just the asset being purchased with the loan). We require standard information about the business’ organization, structure, owners and financial situation, as well as certain verification information as we deem appropriate.

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Anil @ PeerCube May 17, 2013 at 12:00 pm

Alex, thanks for the quick response. How much information about business and owners is available to lenders? I guess I need to check the site to see the amount of details.

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Alex Binkley May 17, 2013 at 12:28 pm

Hi Anil – You can see what we have available online at the site, but I would also love additional thoughts on pieces of information you would like to see published (or do not particularly care about). I left my email in another comment as well, but you can reach me directly at alex[at]fundingcommunity.com

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Ray May 17, 2013 at 9:32 am

I opened an account this morning and just threw $50 in to start with. Need to see how this will go before I put any more money in.

Again – great potential here!

Alex, when do you anticipate getting things off the ground in Minnesota?

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Alex Binkley May 17, 2013 at 9:57 am

Hi Ray – Thanks for signing up and lending. Hopefully you found the process fairly simple. I don’t think we will disappoint you as we go, but if you have any questions or feedback you (and anyone else) can feel free to email me directly at alex[at]fundingcommunity.com.

Minnesota is a good question. We will likely expand as we see borrower demand, so if you know businesses that would like what we are doing encourage them to apply so we know where we stand. They will be first in line when we go live and can pull their application at any time if their needs change.

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Dan B May 17, 2013 at 1:09 pm

Alex………..You need to proofread the answer in your FAQ Why should I lend money on FundingCommunity?…………….so that it makes sense.

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Alex Binkley May 17, 2013 at 1:16 pm

Thanks so much Dan. My team has fixed it!

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RV_Carol May 17, 2013 at 1:41 pm

Thank you Peter for bringing this to my attention. As a former small business owner, I am excited to be able to help out others. And as someone who is recently retired, I appreciate these p2p and p2b models that let me invest in any easy hands on way. They also give me a great excuse to keep staring at my computer for endless hours at a time!

Thank you Alex for answering our questions. I just signed up too.

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Dan B May 17, 2013 at 4:38 pm

Alex……….How does Funding Community make money? Does it charge borrowers an origination fee, or does it make money via a spread between the rates we lenders are being paid & the interest rate charged to borrowers? If so, what is the range of that spread?

Also, why the repeated references on your site such as this one ” lenders should not think of this loan as an investment and should have no expectation of making a return.”? Is this some sort of disclaimer in order to satisfy legal requirements under the exemption that you suggest permits the inclusion of unaccredited investors on this type of loan?

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Alex Binkley May 17, 2013 at 7:51 pm

Hi Dan – We have a similar structure to LC in that we charge a 2.5% origination fee (which tends to be lower than LC’s) to the borrower and 0.5% service fee to each lender (again, typically lower than LC’s). Our origination fee for subsequent loans in a 24 month period is discounted to 1.5%.

The disclaimer is a partial response to our regulatory analysis. As you have likely seen on the site, all our borrowers are under a legal obligation to repay their loans, including with a security interest in their assets and a personal guarantee.

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Dan B May 17, 2013 at 8:50 pm

Thanks, I appreciate the timely response & info.

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Peter Renton May 17, 2013 at 8:53 pm

I also want to say thank you to Alex for being so on top of all the comments today. Clearly, there is interest in an investment opportunity like this that is open to everybody.

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Phillip McFarland May 17, 2013 at 10:18 pm

Great idea and once again Peter’s helping spotlight the way for new exciting investment opportunities. I will be opening an account also and hope to help out and make this the next mainstream hit.

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Martin May 20, 2013 at 7:59 pm

Looks like a great new opportunity. But to say whether it is a great opportunity or not, the best way is to try it, so I opened an account, trasferred $100 and let’s see how that will work. Great tip Peter, thanks!

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CA-Lender May 22, 2013 at 1:24 pm

@Alex,

I love the idea…sorta a Kickerstarter with the benefits plus some income as well.

I just threw in a few bucks into a new account, and had a question. Are the benefits transferable? I’m in CA and have no need for a personal fitness trainer in NY, but I do have friends in NY that I might be able to pass that that benefit (the bodyaddicts LLC loan).

Thanks,

CA-Lender

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Alex Binkley May 23, 2013 at 8:43 am

Thanks so much CA-Lender, this is exactly how we are thinking about this as well.

We are definitely aware that people outside of the state might have a harder time using the reward and are working on some solutions. For now we are going to leave it up to each borrower whether the benefits are transferable, but I think bodyaddicts will be amenable. I will follow up with more information on this if/when when the loan closes.

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Jilliene Helman June 4, 2013 at 6:00 pm

Alex – Congrats. I just signed up and made my first loan! Best wishes to you and your team – we are also exhibiting (www.realtymogul.com) at LendIt – would enjoy connecting.

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