Our model has gone through several iterations over the years, and I thought HN might be interested in our latest one! It’s called “Pay it Forward” and the key idea is that entrepreneurs fund new projects by other entrepreneurs instead of repaying lenders directly. Some background on why we arrived at this iteration:
With our traditional microloans, when the borrower repaid their loan, the money went back to the lenders, who then would choose new projects to fund with it. The problem was that funds often went unused for long periods, because many lenders don’t have the time to choose new projects each time repayments come in. We built an automated relending tool to try to address this, but it lacks the ability to vet projects for quality or to provide the human connection that manual lending does. Normally, the lending process involves messaging, photo sharing, and so on, between lenders and entrepreneurs, which is more meaningful for everybody.
The users who typically spend the most time on our platform are the entrepreneurs. Access to loans is often a life-changing opportunity for them, and many choose to give back to the community by serving as Volunteer Mentors - a role that involves vetting new applicants, conducting orientations of new members via WhatsApp, and mentoring newer members as they grow their businesses. They are often best placed to know who is most trustworthy and which projects are good investments. Many have expressed interest in "graduating" from a borrower to a lender on the platform, but up until now we had no mechanism for the entrepreneurs to fund loans. So we’ve built one!
In the new system, projects must be repaid, just like traditional loans. But instead of repaying lenders, the entrepreneurs allocate the repayments to other projects on the platform. The original lenders can track the follow-on projects that are funded by their chosen entrepreneurs, so they get to see how their impact continues to multiply as funds are recycled over and over.
Unlike loans, Pay It Forward projects have no fees or interest other than a 5% service fee to cover money transfer and operating costs. (First-time participants who don't have an invite from an existing member also pay a one-time fee of about $10, which covers the cost of a background check and lifetime membership.) Once projects are repaid, the entrepreneurs can choose to deposit an extra amount of between 0 and 25% of the amount raised to fund other projects in the platform. Their next project fundraising amount limit is then increased by the extra amount they chose to deposit, plus a matching increase from us. (For example, an entrepreneur who raises $100 can choose to repay the $100 then contribute an extra up to $25 to the community. If they contribute an extra $25, then their next fundraising amount is $150.) This enables financial sustainability and growth of the project funding capital, without burdening any entrepreneur who prefers not to make extra payments.
We have opened the Pay It Forward product to the community after a period of beta testing. Early data suggest that repayment performance will be the same or better than that of our traditional loans. Thus far, the majority of entrepreneurs have opted to make some extra payment into the community at the conclusion of their projects.
This is a departure from the traditional P2P lending concept and we're not aware of a similar model being tried elsewhere. I'm very interested to hear your ideas and feedback in the thread, and you are always welcome to contact me at julia@zidisha.org!