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Easy money: Richard Branson helps fund U.S. entrepeneurs
A woman wearing a T-shirt with the slogan "Go fund yourself" across her chest offers me a grilled shrimp hors d'oeuvre. Another woman, dressed as a "Georgette" (a female version of George Washington), hands out dollar bills with a blank face on the front. The scene? A launch party in Boston for Richard Branson's new company, Virgin Money USA. The message? Branson's new firm will change the face of money by replacing inflexible loans from big banks with a more personal, nimble approach to lending.
Earlier this year Branson bought Circle Lending, a Waltham, Mass., company founded six years ago by former management consultant Asheesh Advani, and christened it Virgin Money. The firm formalizes lending relationships among friends and family.
Rather than lend money for mortgages, student loans, and small businesses directly, Virgin Money is a third-party broker, or "marriage counselor," that manages repayment plans among friends and family members - long the major source of funding for startups. Why do you need Virgin Money to borrow from your mom? These relationships can get emotionally complicated. Virgin Money mitigates any awkwardness by handling the payments; consequently default rates decrease to 5% from 14%, claims Advani, who is staying on as CEO of the new company.
Wealth preservation is another reason to borrow from family: Interest payments go to family members rather than to the bank. Borrowers get to build their credit rating and have the flexibility to miss the occasional payment. The company will also offer a small-business loan program to entrepreneurs later in 2008 or 2009. Virgin Money will match business loans made by friends and family once a borrower's good credit gets established.
Dr. Giridhar Kamath is a Virgin Money customer who needed capital for his startup business - an emergency medical practice in Albany, N.Y. His $150,000 loan at 10% annual interest over five years (a competing bank had offered a 17% rate) doesn't require monthly payments until the practice starts generating income.
At first the lender - his father - didn't think an intermediary was necessary, but Dr. Kamath insisted on legitimizing the arrangement. "Beyond providing proper documentation, Virgin Money allows you to build a credit history by transmitting your repayment information to a credit agency." The downside? For smaller loans the flat monthly fees can add up as a proportion of the payment, says Kamath. Virgin charges an upfront fee of $99 for personal loans, $199 for small-business loans, and $699 to $2,000 for mortgages, plus a $9 servicing fee for each payment.
Virgin Money is the splashiest player yet in the growing peer-to-peer lending market. Through companies such as Prosper and Zopa, strangers lend strangers money at an agreed-upon interest rate. Prosper, started in 2006, has serviced roughly $95 million in loans. Circle has serviced roughly $200 million in loans since 2001. Advani attributes his slower growth to the company's vintage; he started Circle before consumers - or VCs - were familiar with the concept of peer lending. While Prosper raised institutional capital from the outset, Advani cobbled together money from 75 individual investors. In 2006 he finally secured venture capital.
The Virgin rebranding of Circle and its have-some-fun-with-it marketing campaign might be just what the company needs. Slogans such as "Family, friends, and loans: Are you ready for a threesome?" will no doubt add a cheeky tone to the staid financial industry - a voice that Branson bets entrepreneurs will appreciate.
- JESSICA HARRIS