Crowdsourced loans to SMEs

Provide an online peer-to-SME lending market that connects lenders with SMEs needing a loan. The lenders can be private financial institutions, individual investors, companies, foundations and civil society organizations. The SMEs receiving loans can be in a developed or developing country. The loan amount can be distributed across a country's population to share the risk of providing a loan.

About You

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About You

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Rene

Last Name

Sugar

Your Organization

Country

United States

About Your Organization

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Organization Country

United States

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Your solution

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Name Your solution

Crowdsourced loans to SMEs

Describe Your Solution

Provide an online peer-to-SME lending market that connects lenders with SMEs needing a loan. The lenders can be private financial institutions, individual investors, companies, foundations and civil society organizations. The SMEs receiving loans can be in a developed or developing country. The loan amount can be distributed across a country's population to share the risk of providing a loan.

Country your work focuses on

n/a

If multiple countries, please list them here. If your solution targets an entire region, please select it below

Region(s) your solution focuses on:

Range of turnover in your target firms, in USD

Less than $1 Million, $1-5 Million, $6-10 Million.

Average turnover in USD of your target firm

$1000000

Number of employees in your target firms

Fewer than 5, 5-24, 25-49.

Average number of employees of your target firm

10

Specify the size, average and range of expected loans or investments in each target firm

The average and range of loans would vary by country depending upon local costs associated with helping SMEs. In developing countries, smaller loans would be effective while larger loans would be required in developed countries.

What stage is your solution in?

Idea phase

Innovation

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What makes your innovative solution unique?

It allows individuals in a country to help others in their country and those in other countries around the world through pooling their financial resources to provide SME loans.

When private financial institutions do not want to take the risk of providing a loan or providing the entire loan amount, the risk of providing the loan can be spread across the entire population of the country (individual investors), companies, foundations and civil society organizations.

There are several other benefits that a peer-to-SME lending market can provide:

1. This method of financing is an alternative to governments always having to raise taxes or go into debt to fund economic development in their own countries. Individuals can participate directly in financing the economic development of their country and get a return on their investment for doing so.

This is also an option in a developing country after a sufficient amount of economic development has taken place.

2. Governments could participate in the lending market as part of their foreign aid and economic development programs making those programs more sustainable, to fund large revenue generating infrastructure projects (e.g. high-speed rail, ultra high-speed broadband networks).

3. SME Health Care Insurance Provider

The employees of a large enterprise constitute a health care risk pool which can negotiate a better price because of the amount of income to a health care insurance provider they represent. Being able to hold a job implies a certain level of health.

While each SME has employees who have the same level of health as those in a large enterprise, they do not have the same buying power because, individually, SMEs do not represent the same amount of business to a health care insurance provider.

All the SMEs and their employees in a state or province can crowdsource a loan to fund their own health care insurance provider that exists to offer better insurance to their employees.

How does your proposed innovation leverage public intervention in catalyzing private SME finance?

Public intervention would be used to:

(a) Set up agreements between countries to allow SME loans to be easily moved from a developed country to a developing country and loan payments to move back to the developed country.

(b) Help pay for the software and the hardware used to provide the peer-to-SME lending market. This cost could be shared with private financial institutions, companies, foundations and civil society organizations.

(c) Hire and train staff to review SME loan applications, manage loans, operate the datacenter, etc.. Existing economic development banks could provide the expertise to train staff.

(d) Educate the population of a developed country on the benefits of using the peer-to-SME lending market both for their country and SMEs in developing countries.

(e) Negotiate with private financial institutions on how to best fund the operation of the market. The private financial institution running the peer-to-SME lending market can fund operations either by other private financial institutions owning shares and providing capital to run operations or by charging other private financial institutions to access the market.

(f) Make crowdsourced loans where there are a very large number of participants legal in developed countries.

(g) Where possible, negotiate with governments in developing countries to approve projects that make person-to-person payments via mobile phone possible.

It would be easier to track the money loaned if SMEs and suppliers could make payments using their mobile phones.

In some developing countries such as those in Africa, satellite Internet is available:

http://www.globaltt.com/

With mobile phone service and/or satellite Internet, many financial transactions could be cashless.

There are several existing person-to-person and person-to-merchant payment services that allow customers to make payments with their mobile phone:

(a) U.S. Bank uses CashEdge's PopMoney.

https://www.popmoney.com/

(b) In the Netherlands, Rabobank uses MiniTix.

http://www.minitix.nl/

(c) In Kenya, Safaricom, in partnership with Vodaphone, has a service called M-PESA.

http://www.safaricom.co.ke/

PaySimple is used by American Express to offer their AcceptPay service. Businesses can invoice, collect and manage customers' payments.

http://www.paysimple.com/

http://www.acceptpay.com/

If a developing country has a banking industry with Internet access in some part(s) of the country, SMEs could transfer money to suppliers at a local credit union using satellite Internet access or using their mobile phones where mobile phone service is available.

A bank in the developing country could offer services like PopMoney and PaySimple. That service could then send the invoices and receipts to the private financial institution in the developed country managing the loan to keep track of payments.

If broadband Internet networks are developed, mobile phone traffic can be handled via WiFi on the Internet when available instead of relying exclusively on the development of the mobile phone network.

http://www.ipaccess.com/

http://www.percello.com/

http://www.ubiquisys.com/

http://www.ccpu.com/

http://www.tcmmobile.com/

http://gttel.com/

http://www.servalproject.org/

http://lightsquared.com/

Once the lending market is set up, the financing for SME loans is provided by private sources.

What barriers does your proposed solution address?

Lack of collateral, Lack of financial capacity, Unavailability of financial products tailored to SME needs.

If you checked any of these barriers, describe how your solution addresses them

(a) Lack of collateral

The income to repay the loan can come from the project completed using the SME loan. This allows new businesses to be financed.

Since the risk of providing an SME loan can be shared across the population of an entire country, the terms of the SME loan can be more flexible.

To cut loan default rates, the Entrepreneurial Finance Lab (EFL), a branch of the Harvard Kennedy School's Center for International Development, has developed a psychometric test to screen loan applicants. EFL says the test will cut loan default rates by 25 percent to 40 percent.

South Africa's Standard Bank is rolling out the test in South Africa and Kenya this August.

If the test works in Africa, EFL plans to introduce it to the U.S. and Canada where many immigrant entrepreneurs also lack credit histories and collateral.

(b) Lack of financial capacity

This solution allows the population of an entire developed country to pool their financial resources to provide the capital for SME loans.

The capital for SME loans in developing and developed countries will come from the SME lending market in developed countries.

(c) Unavailability of financial products tailored to SME needs

If a private financial institution evaluating an SME loan application decides not to fund the loan or only a portion of the loan, and the SME meets the criteria for a loan, the loan request is published in the SME lending market.

To develop the banking industry in developing countries, community development credit unions purposed with funding SMEs could be created to handle loan issuance, collection, and support.

http://www.cdcu.coop/

http://www.woccu.org/about/creditunion

If possible, existing organizations (e.g. microfinance institutions) already operating in the area could be developed into community development credit unions or help establish community development credit unions with the capital provided by SME lending markets in developed countries.

Over time, individuals and SMEs in developing countries would have their own income to contribute to the services provided by the credit union supplemented by SME lending markets in developed countries.

Eventually, members (e.g. individuals, SMEs) of the credit unions would have enough capital to fund the services they provide to SMEs.

Impact

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Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

The proposed solution is being used by kiva.org and kickstarter.com on a smaller scale to solve similar problems.

Kiva.org has several thousand examples of what their loans have made possible:

http://www.kiva.org/journals/

Kiva.org limits their loans to micro-finance loans to people in developing countries.

Kickstarter.com limits their loans to artists.

I am proposing that loans be provided to a wider range of SMEs in developed and developing countries.

Uppspretta in Iceland and FriendsClear Pro in France are online peer-to-peer lending services where individuals can lend to businesses.

Grow Venture Community is headquartered in Hong Kong, with offices in the U.K. and Finland. Grow VC uses crowd-funding to help startups secure initial funding of up to $1 million USD for their businesses.

Sponsume in the U.K. uses crowd-funding to finance loans for new businesses and other projects.

ProFounder in the U.S. uses crowd-funding to finance loans for small businesses. It was founded by a former Kiva employee.

In Canada, Sprouter is a online service where entrepreneurs can network and collaborate. It is one way for entrepreneurs and investors to find new companies.

Here is a partial list of peer-to-peer lending and micro-credit companies:

Austria

http://www.mymicrocredit.org/

"MyMicroCredit.org is a non-profit-organization located in Austria. The vision is to reduce poverty in developing latin and central American countries."

Brazil

https://www.fairplace.com.br/

Canada

http://www.communitylend.com/

http://sprouter.com/

Czech Republic

http://www.myelen.com/myelen/

Denmark

https://www.myc4.com/About

"MYC4 is an online marketplace that connects you directly with African entrepreneurs, who lack capital to develop their businesses."

Estonia

http://www.isepankur.ee/eng

France

http://www.friendsclear.com/

"FriendsClear Pro connects via the internet, entrepreneurs with financing needs with individuals who lend them money."

Germany

https://www.auxmoney.com/

http://www.smava.de/

Hong Kong

http://www.growvc.com/main/

Hungary

https://www.noba.hu/index.action

Iceland

http://uppspretta.is/default.aspx

Japan

https://www.aqush.jp/

http://www.exchange.co.jp/

Kenya

http://www.safaricom.co.ke/

Korea

http://www.moneyauction.co.kr/

Netherlands

http://www.crowdaboutnow.com/

New Zealand

http://nexx.co.nz/

Poland

https://kokos.pl/

https://www.finansowo.pl/

Spain

http://www.cajanavarra.es/en/

U.K.

http://uk.zopa.com/ (also U.S., Italy, Japan)

http://www.sponsume.com/

U.S.

http://www.prosper.com/

http://www.lendingclub.com/

http://www.profounder.com/

http://www.webbank.com/

http://www.people2capital.com/ (student loans)

How many firms do you expect to reach?

Since this solution is meant to be scaled up to provide loans around the world, a specific number of firms cannot be given.

What is the volume of private SME finance you aim to catalyze?

I aim to catalyze the private SME finance capacity of an entire developed country.

What time frame will be required to reach these targets?

The solution can be operating independently within five years.

If existing software and software services can be used, the peer-to-SME lending market can be implemented more quickly:

1. Google (Commerce Search)

2. OpenStack is an open-source cloud platform incorporating technology from RackSpace and the Nebula Cloud Platform developed by NASA.

3. Nimbula

4. Gluster

5. Cloudera

6. Paypal

7. Temenos (banking software)

If the solution can be implemented by existing economic development banks, the time to implement the solution can be reduced further.

Where credit unions do not exist to manage loans in developing countries, they will have to be established. There are some existing organizations being used by Kiva.org to manage loans in developing countries.

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

A lack of interest by the population of a developed country in participating, fraud from SME loan recipients, or corruption in the governments of developing countries diverting money meant for SMEs.

In a developing country, fraud would show up as a high default rate on loans to SMEs.

If the fraud is perpetrated by local politicians, the federal government in the developing country could use Brazil's approach of informing the local population of which local politicians are corrupt (see the paper titled 'Exposing Corrupt Politicians: The Effect of Brazil’s Publicly Released Audits on Electoral Outcomes').

If the fraud is perpetrated by organized crime, a high default rate indicates that the local or federal government in the developing country should be notified that they have a crime problem in that area. They are motivated to deal with the problem to ensure they have continued access to funds.

If the fraud is perpetrated by the federal government in the developing country, I would not invest in that country. Though, as long as funds can be distributed to local credit unions reliably, it would be difficult for a corrupt federal government to steal the funds distributed across an entire country.

The size of loans could be limited where crime is a large problem to increase the amount of work a criminal organization would have to do to steal funds. If the local government manages to reduce crime, the size of loans can be increased.

Describe the social impact of your innovation. Please include both numbers and stories as evidence of this impact

As we have seen during the global financial crisis, private financial institutions are not always capable of providing loans to those who need them. The infrastructure for individuals to help each other in a sustainable way is needed.

There are numerous examples of how micro-finance has helped individuals in developing countries.

This idea is expanded to individuals providing loans to SMEs whether the recipient of the loan is in a developed or developing country.

Here is an example of how providing a loan to electric vehicle manufacturer(s) in the United States and the European Union has social, economic, and environmental benefits to countries around the world.

Example: United States

8990000 barrels/day gasoline * 365.25 days * 42 gallons/barrel * $2.76/gallon = $380,634,622,200 spent on gasoline per year

8990000 barrels/day gasoline * 365.25 days = 3,283,597,500 barrels/year gasoline

3,283,597,500 barrels/year gasoline * 2 * $78.75 = $517,166,606,250 spent on crude oil per year to obtain the gasoline

$380,634,622,200 / 135,932,930 = $2800.1649210386328022209188016473 per passenger car for gasoline

~$2,800,164,921 per million passenger cars per year spent on gasoline

Nissan-Renault's CEO has estimated sales of 1 million electric cars per year are needed to reduce costs and no longer require financial support.

One or more SMEs selling electric passenger cars could obtain a $10 billion long term loan to finance a $10,000 price reduction for 1 million electric passenger cars.

$100 x 100,000,000 people = $10,000,000,000

Besides the interest earned on the loan, there is a further benefit to the United States of $2.8 billion (rough estimate) remaining in the U.S. economy for every 1 million electric passenger cars sold. That is a rough estimate since it takes two barrels of crude oil to make one barrel of gasoline and some portion of the money spent on gasoline already stays in the U.S. economy.

The motivations for the people of the United States are economic, environmental and not having to have the military defend access to crude oil around the world.

Sources:

http://www.eia.doe.gov/emeu/steo/pub/#US_Crude_Oil_And_Liquid_Fuels

http://www.bts.gov/publications/national_transportation_statistics/html/...

http://www.reuters.com/article/idUSTRE64P5PY20100526

Sustainability

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List all the funding sources that are required for the sustainability of this solution

The funding is provided by private financial institutions, individual investors, companies, foundations and civil society organizations.

The contributions of individual investors could provide most of the funding and provide the means for widely distributing the risk of SME loans over the entire population of a developed country.

By having only one peer-to-SME lending market in a country for crowdsourced loans to SMEs, it is possible to fund large SME loans from small contributions by a large population of individual investors.

Having only one peer-to-SME lending market in a country for crowdsourced loans to SMEs is critical to funding large loans.

It is analogous to there being very few stock markets in a country.

If the population is distributed across multiple peer-to-SME lending markets, it reduces the multiplier effect of a large population on small loan contributions.

Example:

$100 x 10,000,000 = $1 billion

$100 x 1,000,000 = $100 million

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

The proposed solution can be operating independently within five years.

The funding to run the peer-to-SME lending market would come from private financial institutions, companies, foundations and civil society organizations.

These organizations would own shares in the separate private financial institution running the peer-to-SME lending market and share the operating costs.

Individual investors would not pay to participate in the peer-to-SME lending market as their contributions provide most of the funding and provide the means for widely distributing the risk of SME loans.

(a) Developing country

In a developing country, a local bank or credit union would be responsible for initially evaluating the SME to determine if it meets the funding requirements.

If the SME loan application passes the initial evaluation, the funding request is entered into the online peer-to-SME lending market where it is evaluated by an economic development bank to verify the funding request meets requirements.

If is passes the evaluation, it is published and made available for funding on the online peer-to-SME lending market.

(b) Developed country

In a developed country, an SME would go to a bank or credit union to have the funding request entered into the online peer-to-SME lending market if the bank or credit union did not want to fund the loan or only wanted to fund part of the loan.

The motivation for banks and credit unions to participate is they get the first chance to fund the loan and have the opportunity to fund only part of the loan if the rest is funded on the lending market.

If a bank or credit union does not want to provide the loan themselves, they would be required by law to enter the loan request into the online peer-to-SME lending market if the SME meets the criteria.

If the SME does not meet the criteria, banks and credit unions would be required by law to give the SME a letter detailing why it does not meet the criteria. If the SME can make changes to meet the criteria, they can reapply for the loan.

The bank or credit union could charge a fee to process the SME loan application.

Since the loan may be for a project that will provide new income, the repayment of the loan could be delayed until the project is completed and providing income.

This allows new businesses to be financed.

Investors are repaid incrementally as SMEs pay back their loans.

For larger SMEs not funded by individuals, financial services companies could offer an investment product to their customers where they choose what loans to fund on behalf of their customers. Such an investment product could be part of the portfolio of customers in developed countries.

Criteria for what SMEs to fund would be up to the investor choosing from the SMEs available in the lending market.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

The source of funding is scaled out to the entire population of a country and its private financial institutions, companies, foundations and civil society organizations.

If the benefits (interest earned on loans, improved economy, etc.) are sufficient, it is unlikely that the entire population will stop participating even if some organizations stop participating.

The proposed solution provides the means to raise additional funding to continue operations if it becomes necessary to do so.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

(a) Developed country

- government needs to support the transfer of SME loans to the developing country and the transfer of loan payments back to the developed country.

- government needs to provide legislation that makes the solution possible.

- economic development banks could provide much of the expertise needed to implement this solution.

- private financial institutions to participate in operation of the solution.

- entrepreneurs to build software and datacenter

- the population of the country participating in SME loans to finance economic development in their country and developing countries

(b) Developing country

- government of the country receiving SME loans will have to cooperate in recovering money in the event of fraud.

- government needs to support projects to build communications networks to make banking and payments via mobile phone possible.

- credit unions will have to be established where they do not exist.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

(a) A lack of interest by the population of a developed country in participating could threaten the sustainability of the proposed solution.

(b) A shortage of an educated workers could limit the success of SMEs in developing countries.

By developing broadband Internet in developing countries, it would be possible to make a entire curriculum of K-12 to advanced education available online to entire populations for free.

This is already being done on a small scale by some universities:

http://www.youtube.com/edu/

There is a company doing the same for K-12 education:

http://www.k12.com/

California Learning Resource Network identifies and reviews supplemental electronic learning resources such as software, video, and Internet resources and provides an online database to find those learning resources.

http://www.clrn.org/

In developing countries, video instruction could be watched on laptops. Until broadband Internet is available, the learning material can be shipped to schools and watched via a school's local computer network.

In developed countries, video instruction could be watched on Internet TVs or computers. Internet TVs are televisions that get their video feeds from video streaming sites on the Internet such as Youtube.

In developed countries, universities could charge fees to administer tests for advanced placement based upon what a student learned at home. Or, if people did not need a formal degree, they could apply what they learn to creating an SME.

Example: Schools in Tanzania

A 42" monitor capable of being connected to a laptop with a HDMI cable currently costs $880 USD. An HDMI cable costs about $20 USD. The laptop costs $600 USD.

($600 + $20 + $880) * (16,000,000 / 30) = $800,000,000 USD

If 100 million people in developed countries participated in a loan to the country of Tanzania, it would cost $8 USD per person to supply a 42" monitor, laptop and HDMI cable to each classroom.

The government of Tanzania could pay back the loan over several years.

In a developed country, residents of a city or town could use the same solution to provide new equipment to their schools instead of having to raise taxes or make budget cuts; since each person's contribution to the loan is a small amount they could afford to write off the loan.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

The proposed solution aims to expand immediately to multiple sectors and scale up geographically over time.

After building the online peer-to-SME lending market, the next steps are:

1) Initially, make it available to the population in the developed country to invest in the economic development of their own country. With a stronger economy,
they will have more money to invest.

2) After the population in the developed country is familiar with the peer-to-SME lending market and understands the benefits it provides, roll it out to developing countries where credit unions already exist. The size of loans could be increased over time to see if local conditions make investment possible.

3) In developing countries where credit unions do not exist, provide training on how to create and operate one before making the peer-to-SME lending market available in that country. As credit unions are created, the peer-to-SME lending market can be made available. This also helps to build the banking system in the developing country.

Example: Tanzania

1. Develop power utilities

(a) plasma gasification can be used in energy, metallurgical and chemical industries

(b) plasma gasification plants can also use several carbon feedstocks to create energy - biomass (e.g. agricultural waste), sewage sludge, municipal waste

2. Develop fuel industry

(a) plasma gasification can convert biomass into ethanol. The biomass resources used in the plasma gasification process are non-food based and do not contribute to deforestation.

(b) Brazil uses ethanol for powering many of their vehicles

3. Develop mining and extractive metallurgy industries

(a) Tanzania has the raw materials to make iron, steel, concrete, etc.

(b) one example of extractive metallurgy is iron smelting

4. Use materials from mining and extractive metallurgy industries to construct railroads

(a) develop industries to construct parts for railroad lines

(b) use concrete railroad ties

(c) railroads can provide the means to get agricultural goods to market and farming equipment and supplies to farmers

5. Develop housing industry

(a) use concrete as the main building material in house construction

(b) develop industries to manufacture wiring, pipes, etc. from materials produced by extractive metallurgy industries

(c) associated with this are plumbing (e.g. toilets), sanitation, and wastewater treatment

6. Further develop agriculture industry

(a) includes developing farm equipment manufacturing

7. Broadband Internet and Cellular Networks

(a) Low-cost femtocells (<$100) can be connected to broadband Internet to provide cellular service

(b) WiFi technology and open source software is being used to create broadband Internet networks

8. Person-to-Person Payments via Mobile Phone

Sources:

http://www.tanzania.go.tz/

http://www.westinghouse-plasma.com/

http://www.ubiquisys.com/

http://www.ictregulationtoolkit.org/en/Section.3184.html

http://www.wirelessghana.com/node/3

91 weeks ago Kevin Tran said: kinh mat. Hi, this is a very interesting web page and I have enjoyed read­ing many of the arti­cles and posts con­tained on the ... about this Competition Entry. - read more >
91 weeks ago Kevin Tran said: Hi, this is a very interesting web page and I have enjoyed read­ing many of the arti­cles and posts con­tained on the web­site, keep up ... about this Competition Entry. - read more >
182 weeks ago Rene Sugar said: Peer-to-peer small business lending in ... about this Competition Entry. - read more >
184 weeks ago Rene Sugar said: http://online.wsj.com/article/SB10001424052748704843404576251160999848924.html "Federal securities regulators are weighing demands to ... about this Competition Entry. - read more >
215 weeks ago Rene Sugar said: To implement a software project on this scale, you need to be aware that organizational structure and performance management practices ... about this Competition Entry. - read more >
220 weeks ago Rene Sugar said: The lack of available skilled workers is one of the conditions limiting the success of SME's in developing countries (in developed ... about this Competition Entry. - read more >
221 weeks ago Rene Sugar updated this Competition Entry.
221 weeks ago Rene Sugar updated this Competition Entry.
221 weeks ago Rene Sugar updated this Competition Entry.
221 weeks ago Rene Sugar said: A $35 computer would put a complete online K-12 to university education within reach of a lot of people. It would also make online ... about this Competition Entry. - read more >