Today, banks and traditional money lenders are not the only source of credit to individual customers and small businesses. Instead, the Internet has led to the creation of peer-to-peer (P2P) lending that helps match borrowers with lenders through online platforms for small loans. P2P lenders are able to fund smaller debt requirements by being able to stay away from the high costs that are attributed to maintaining a brick-and-mortar bank and to meet the several capital adequacy requirements that govern the bank. According to Foundation Capital partner Charles Moldow, this new generation of lenders will help transact in more than $1 trillion by 2025.
San Francisco-based Prosper was founded in 2006 by Chris Larsen and John Witchel and was a pioneer in the concept of P2P or social lending. Using Prosper’s platform, borrowers can request for loans ranging from $2,000-$35,000 and lenders can invest as little as $25 to fund these loans. The lender can select the loans they want to fund based on the availability of credit scores, ratings, histories, endorsements, and other affiliations. For a borrower to request money on Prosper’s platform, they have to have a minimum FICO credit score of 640 and interest is charged to them at rates ranging from 6%-35% based on credit tiers. Meanwhile, investors can expect to get returns of an average of 9%. Besides providing a marketplace for the loan, Prosper also works with investors to help diversify their portfolio and guides borrowers on how to improve their loan terms.
Prosper had to stop their lending activities in 2008 when the SEC restricted lending on the platform because they hadn’t registered as a seller of securities. Since then, though, the SEC has been more open to newer financial services and okayed Prosper’s re-launch in 2009.
Since then, Prosper has seen rapid growth in the recent quarters with monthly platform originations growing from $9 million in January 2013 to $100 million by April 2013. As of April this year, Prosper crossed the milestone of $1 billion in total loans originated on its platform. Prosper expects to double this number to $2 billion in cumulative loans before the end of the year. They have a user base of more than 2 million members and claim to have 35% of the market. While the P2P market has now even extended to small businesses, Prosper wants to continue to focus on individual retail customers.
Prosper is still venture funded with $190 million in funds received from Phenomen Ventures, Institutional Venture Partners, Francisco Partners, BlackRock, Sequoia Capital, Crosslink Capital, Draper Fisher Jurvetson (DFJ), CompuCredit, Accel Partners, TomorrowVentures, Omidyar Network, Eric Schmidt, Meritech Capital Partners, DAG Ventures, Benchmark, Accel Partners, QED Investors, and Fidelity Ventures. Their latest round of funding was held last month when they raised $70 million in a round led by Francisco Partners at an estimated valuation of $600 million. The new funds are expected to be deployed toward sales and marketing efforts and for product development.