Asheesh Advani – Battled skepticism

Shakespeare’s famous line neither a borrower nor a lender be almost assuredly relates to the dangers of personal and private loans. Nearly everyone can relate an anecdote regarding formerly intimate family or friends who no longer speak to each other after a loan went awry.

Enter CircleLending. The Cambridge-based Internet company launched in March and has been enjoying success by capitalizing on the virtually untapped $65 billion peer-to-peer lending business.

Asheesh Advani, the founder, president and chief executive officer of the company, got the idea when he worked for the World Bank in Washington. The volume of informal credit transactions between individuals is enormous, he said.

CircleLending uses the Internet to facilitate person-to-person loans by supplying customized promissory notes for the borrower and lender. Borrowers or lenders can visit the site and start the process, which includes loan calculators for rates of repayment and easily followed instructions for those wishing to formalize loans for anything from small business financing to parent-student loans.

Two recent regulatory changes really cleared the way for Advani to start his business, he said. One was the passage of the electronic signature law and the other gave consumers the ability to authorize a Web-enabled bank-to-bank automated clearinghouse transfer.

So it was a result of these two regulatory changes that we can operate this business as profitably as we do. Our margins are very good, said Advani. The private company does not release earnings publicly.

One of the reasons the company has prospered is that it is virtually alone in the niche it operates in, said Advani. According to a study done by Monitor Co., one of the investors, there are four categories of competitors for CircleLending. These include loan agreements that can be found online, person-to-person payment systems – a way in which a consumer can move money between accounts; online collections agencies and online tillers.

They don’t really target the family-and-friend loan space. They’re targeted much more towards small business-type billing … this is a pretty unique idea. There are not too many people who’ve put this full package together to address the market, said Advani.

According to Jill Miller, vice president of marketing for CircleLending, the flexibility the company provides customers is the key to its success.

Historically, the miscommunications and the assumptions around a person-to-person loan are pretty significant, she said. The average CircleLending transaction involves a loan of between $10,000 and $15,000. Other loans have ranged up to $150,000, she said.

The reason most people go to a family member or a friend for a loan is to avoid the rigidity of a formal bank or credit card loan. However, even such arrangements can reach a breaking point, said Miller. Therefore, having a written agreement as to when payments should start, how much they should be and when interest starts accruing is very important. But so is the flexibility; the terms of the agreement can be altered to reflect changes in a person’s life.

If you and I come to an agreement today and six months from now I’m experiencing some cash flow issues and I’d really love you to either let me double up on payments or forgive a month, I can do that all through our platform online, she said.

We want you to be a success as a borrower. As the lender, we want to reassure you that your risk will be minimized. And your expectations of repayment through a process that works for the borrower can basically get underway without them being the individual that breathes down your neck, said Miller.

I hear all the time this is such an idea which makes you go ‘aha’ because it really is something which most individuals have dealt with at some point in their lives, either as a borrower or a lender. So many of our investors, of our employees, have gone through personal situations and dealt with the awkwardness of not knowing how to bring up the loan and how to handle the payments, said Advani.

At any given time, there are 7 million outstanding person-to-person loans in the market, said Miller, and the company is alone in its efforts to capture market share. The pricing system for CircleLending customers is tiered. There is an initial setup fee and a percentage of the loan installment is charged to the company. While we are not a collection agency per se, it’s, again, that structure and framework of a neutral third party that allows that to work, said Miller.

Although the idea was unique, Advani said he still had to overcome reticence about CircleLending before getting it off the ground.

I felt that when I first started it, there was a skepticism of anything associated with the Internet because we started this business after the decline in the dot-com world. What I had to do was stress that we do something you cannot do offline, said Advani. There’s absolutely no way to sign and store loan agreements and make it economically feasible in an offline world.

I think many of the businesses that failed in the dot-com world tried to compete with offline partners. We don’t compete at all with offline partners. We have come up with a plug-in solution for them, he said.

The company has established partnerships with a number of organizations as well, including the Center for Women and Enterprise in Boston, to facilitate gap financing to close bank loans, he said.

Additionally, the company works with banks and credit card companies For example, when a bank or a card issuer is trying to collect on that outstanding $5,000 balance, what they say is ‘use CircleLending to find the capital from within your circle of friends and relatives,’ to pay off the debt before it goes to an outside collection agency, said Advani.

There’s plenty of room for growth in the market, said Advani. It’s about double the transaction volume of venture capital annually, which puts it in perspective. And nobody is trying to capture any revenue from that market opportunity except for us, he said.

The downshifting economy shouldn’t affect the business outlook for CircleLending, said Miller.

There are customers that come for small emergency loans of $2,000 to $2,500. That rate has been increasing, said Miller. Given unemployment rates going up and people really trying to reduce their other debt and not max out on their credit cards, I believe this is what we’re seeing in this market – that people are turning to their family and friends to do this. But we have not seen the lender pool dry up, said Miller.