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Crowdfunding pioneer blazes new funding path in St. Louis through loans

In InnovationSTL

8:05 am on Tue, 12.04.12

The founder of a unique debt-based crowdfunding platform will be in town Wednesday to to announce her enterprise’s entry to the St. Louis market.

Candace Klein, founder of SoMoLend
Candace Klein, founder of SoMoLend

Candace Klein, founder of SoMoLend, an online service that allows investors to lend money to small businesses, will be at the St. Louis launch event from 5-7 p.m. at Washington University’s Simon Hall. Klein also chairs CrowdFund Intermediary Regulatory Advocates (CFIRA), the nascent field’s industry group. Her Cincinnati-based company, an Olin Cup winner from last year, is promoting SoMoLaunch, a business plan competition which will give away grants of $1,000 to $5,000.

“It’s web 3.0 where not only are we connecting socially,” said Klein. “We’re connecting with each other financially.”

The crowd helps with due diligence

The effort comes in the wake of last spring’s JOBS Act, a measure which liberalized regulations that had until now limited such investment only to the wealthy. Now new models are springing up offering equity stakes in ventures as opposed to the donation-like “rewards” dynamics previously seen on sites such as Kickstarter.com.  SoMoLend is treading a somewhat different path, offering neither equity nor seeking contributions but rather facilitating loans that are set to be repaid with interest.

“Let’s say you raise $50,000 from 100 different people, all at differing interest rates and under different terms,” said Klein. “In theory that could be a huge headache for you. But what we do is we aggregate all of those loans together into one monthly payment. For the borrower, it feels like they are just repaying a bank loan.”

Except without the bank loan. Instead, ordinary individuals, often friends, family and local supporters of a business, typically foot the bill. Klein believes the lending methodology helps alleviate some of the risk inherent to funding such enterprises.

“The additional protection in the debt space is that debt-based funding is very liquid,” she said, “so unlike equity where you don’t know if you are ever going to get paid back because who knows when that company is going to turn a profit, with a loan, you know within 30 days whether that person is paying.”

While some have sounded notes of caution about changing Depression-era securities laws which were designed to protect non-professionals from investment risks, others have lauded the JOBS Act as a necessary update that will be a huge boon to local investing. Klein points out that the concept isn’t really new. She said some crowdfunding sources have seen lower default rates than banks.

“We’re not the first nation to do this,” she said. “There are other countries which are already allowing crowdfunding – Australia, UK, Germany. In each of those instances, and many of them have been doing it for a matter of years, there have been zero instances of fraud and minimal instances of default.”

She also thinks that potentially undesirable elements will be driven out by extra scrutiny, an idea frequently echoed by advocates who say crowdfunding can create its own form of due diligence.

“What we’ve learned is that there is something to be said for crowd intelligence,” she said. “When a hundred different people are looking into deals from a hundred different directions, they are more likely to uncover a fraudulent transaction and more likely to smell out fraud before it happens.”

She said that while some startups may decide to take advantage of SoMoLend, most enterprises on the platform have been in business for a year or longer.

SoMoLend, has already launched in Ohio and New York City but is only now expanding its horizons further, looking to St. Louis for its next opportunity.

“We only go into communities that want us there and the support that we’ve gotten from the St. Louis community has been amazing,” Klein said. She noted that the response here had outshined even the company’s native Ohio.

That’s included banks themselves, which Klein said have reacted positively to the launch and are eligible to loan on SoMoLend. She said St. Louis had one of the higher number of banks per capita in the nation.

“That’s good and bad because that means that it’s difficult for small businesses to know where the best resource is to raise capital,” she said. “Luckily, a number of those banks have already signed up to lend on our platform in addition to the crowds. Not only can a small business owner raise funds from their friends, family and community. They can also become eligible for bank loans.”

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