Last year when Brooklyn entrepreneur Danielle Katz needed a loan to hire a teacher for the early childhood learning center she started, her options were limited. Her business was new, and it had no credit history. A community organization pointed her to a pilot program run by the peer-to-peer microlending site Kiva, where she listed her loan request. Within a month, Katz, who is 39, secured a $5,000 loan—enough to hire the teacher, and grow her school, “We were able to increase enrollment while keeping tuition affordable,” she said. Best perk: no interest.

Kiva combines the socially minded enthusiasm of a Kickstarter with the financial discipline of a Lending Club to bring affordable small business loans to entrepreneurs. It was launched a decade ago to help business people in developing countries, but after the 2008 financial crisis made it so difficult for small business owners to access capital, co-founder Premal Shah decided to pilot it in the United States. Today, after several years of testing it in multiple cities–Philadelphia, San Francisco, and New York City among them–Kiva is officially rolling out its US lending platform, Kiva Zip, nationwide. Shah will join former President Bill Clinton to make the announcement at a small business event in New York City. Says Shah, “Even if you are underserved by traditional small business lenders in the US, you can likely get on the Internet and start a Kiva account.”

Kiva began as an experiment by a pair of Stanford b-school students who were reviewing projects for a microlender in Uganda. They realized banks could charge microlenders rates of 12 percent or more plus hefty administration fees. These costs to the microlenders were then passed on to the loan recipients—often African first-time entrepreneurs—who had to pay as much as 35 percent in interest on the capital they borrowed. In the US, peer-to-peer bankings sites like Prosper were just launching. By cutting out the banks and setting up a platform on which individuals could invest their own money, Kiva hoped to cut the cost of loans in half for the microlenders with which it partners. Early on, those lenders were mostly Americans intrigued by the notion of “investing” $25-50 at zero interest to help the poor through the market instead of through traditional charity. (Investors do not get a tax break on their investments, since they can withdraw when the borrowers pay them back.) This allows borrowers to access capital at a much lower interest rate, and the company says that 98 percent of its borrowers repay globally.

Now, of course, the idea of crowdsourcing resources has gone mainstream. Everything from your independent film budget (Indiegogo) to your medical advice (CrowdMed) can be crowdsourced. And after years of tussling with the SEC to determine the proper regulatory structure for their businesses, peer-to-peer lending sites like Prosper and LendingClub have hit upon an acceptable, mainstream model for crowdsourcing loans. (Kiva does not have these regulatory issues because lenders do not receive a return on their money; they only receive their principal back.)

Reputation Economics

For the US market, Shah has taken a slightly different approach. He points out that eight of ten small business owners are turned down for loans. His goal, he says, is to fund people who otherwise wouldn’t have access to capital, either because they don’t have the appropriate credit history or because they need a very small loan. (Banks often don’t bother with loans less than $50,000 because they aren’t worth the price of underwriting.) By traditional measures, Kiva’s borrowers are not the safe bets—the borrowers Lending Club and Prosper target who have high personal credit scores. “We are now talking to Lending Club, and saying send us your declines,” says Shah.

Kiva turns to social networks—the real kind, not the digital ones—to help determine the creditworthiness of its borrowers. Potential borrowers must recruit around 20 people to contribute small increments—$25 dollars each—before they qualify for a loan. Once they meet this commitment, they can request up to $10,000, which they must repay within either 24 or 36 months. For example, a restauranteur in Tampa, Florida has requested $5,000 to buy a chocolate fountain and a sneeze guard (critical!) and do some marketing on Facebook as he launches his Belgian chocolate and fruit bistro. A Berkeley, Calif cold brew maker has requested $10,000 to purchase a 300 gallon brew tank, among other things. And a husband-and-wife urban farming team in Minneapolis, Minnesota has requested $4,000 to buy a van and equipment to grow and transport local greens. Before any of them could make the ask, they had to convince 20 members of their local community to back their reputation and likelihood of paying.

So far, Kiva has made just 1,845 loans in the United States, lending $10 million and sourcing most of its borrowers through local community organizations helping out with the pilot program. It’s enough, however, for Shah to feel the platform is ready to expand and open itself to anyone who makes a profile on Kiva or partner Paypal. He says the repayment rate nationwide hovers around 90 percent. More than half the entrepreneurs funded so far have been women; 65 percent have been ethnic minorities.

Shah’s hope is that the idea of “lending local” might catch on with the same fervor as “buying local” and that individuals will feel motivated to make incremental “grants” on Kiva by the same drive that compels them to donate to charities. Judging by the names and profiles of “lenders” on each request, that’s happening. But something else is happening as well. Having had such a great experience with her first Kiva loan, Katz has applied for a $10,000 loan this fall to hire a new teacher, fix up the backyard, and cover insurance. Her lenders also include Lorenz from Hamburg, Germany, and Valentin from Hong Kong. “It comes in from everywhere!” she says. Just like the original Kiva site.


Peer-to-Peer Site Kiva Is Finally Offering No-Interest Microloans in the US