What Are Some Tips for Financing a Small Business?
This is a transcript of a podcast posted March 26, 2006.
 We’re speaking with Asheesh Advani, one of the founders of CircleLending.com and the author of Investors in Your Backyard: How to Raise Business Capital from the People You Know.
NOLO: Asheesh, perhaps you can start out by explaining what CircleLending is, and what it does.
ASHEESH ADVANI: CircleLending was founded five years ago. We formalize and facilitate loans between family, friends, and business associates.
The normal way people do these loans independently of CircleLending is, “Here’s $25,000 for your business; pay me back in five years.” And five years later, even if the business has gone very well, and the family is still living in the home, it’s very difficult to make a lump sum payment of $25,000 dollars; it actually takes a lot of financial discipline to save that kind of money. So, the default rate on these loans is very high. What happens after five years is, the borrower thinks, “Okay, now I’m going to have to start thinking about repaying the loan,” and the lender thinks, “This is when I start getting the full $25,000 back.” And that wasn’t ever communicated clearly at the onset. So, one person hears one thing, and one person says another thing.
So the original insight behind CircleLending was to create repayment plans to make these loans work. Because when you look at the default rate on loans administered through a third party plan through a repayment plan, the default rate is much lower. If you want the numbers, the default rate on loans between family and friends that don’t involve CircleLending is around 14%, and the default rate on loans involving CircleLending is under 5%. Actually, for mortgages, it’s under 1%. So, people don’t tend to default on home loans. They tend to default a little bit more often on business loans, and on emergency personal loans.
NOLO: Why do you think the CircleLending default rate is so much lower than bank loans?
ASHEESH ADVANI: Well, we administer all the payments using direct debit and direct deposit, and I think that if the money’s in the bank account, we take it, which kind of forces financial discipline on you, and if the payments are late, or if you default, then it can impact your credit rating as well, which tends to really trigger certain types of behavior.
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