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Startup Takes on Big Banks With Crowd-Sourced Loans

By  Benjamin Woodard and Adeshina Emmanuel | December 5, 2012 3:39pm 

 Chicago-based startup LendSquare turns customers into small business investors.
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CHICAGO — A Bronzeville-based startup is taking on the big banks with a new crowd-funding program — helping eight small businesses get nearly $65,000 in loans since it started earlier this year.

LendSquare, which asks members of the community for two-year loans that are paid back with interest, was developed by Sebastian Villarreal, a 25-year-old immigrant from Mexico City who studied physics at the University of Chicago before becoming a neuroscience researcher.

Villarreal, the company's sole investor, said he saw the need small businesses have for loans of $10,000 or $20,000 that banks will not take.

"I found a solution to a very real problem," he said. "There was such a need for it and so much commercial potential for it."

So he quit his job to work on LendSquare full-time.

Under the program, those interested in loaning money pledge a loan amount through the website and indicate what percentage they expect to receive in return. An interest rate is selected and the bidders at that rate or lower can make their loan.

Z&H MarketCafe owner Sam Darrigrand, who owns locations on East 47th and 57th streets, said he was desperate for alternatives when banks shied away from refinancing his $19,000 in business credit card debt.

So he turned to his customers — and to LendSquare.

Darrigrand said LendSquare helped him "find the light at the end of the tunnel," after he set up a campaign with the service.

"I was in the Army when I was younger and knowing your end date makes a huge difference," said Darrigrand, 38. "It's just good for your psyche."

Z&H's two-week campaign asked for $18,500, which had been halfway funded in less than a week.

Villarreal was a regular customer at Z&H and came up with LendSquare as a way to help out.

"Sebastian would come in four days a week," Darrigrand said. "He was talking about it [with us] since its conception."

Villarreal said that he "spent a lot of time there" and "wished I could be part of their success. I wished I could help them."

Other small businesses, eight in all, have gotten nearly $65,000 through LendSquare.

Villarreal recently moved to Uptown, where he has already been able to help one small business owner.

Pie Hole Pizza Joint owner Doug Brandt was looking to expand when he ran into a funding problem.

He came across a vacant property in the 5000 block of North Clark Street and thought it would be perfect for a second location of his popular pizza joint.

But the 41-year-old didn't have the money to make the vision a reality. He needed about $30,000 to build a new kitchen and buy other equipment.

Getting a bank loan proved frustrating, he said. He also found lending requirements stringent and soon realized banks were reluctant to lend money to someone opening a new restaurant.

Brandt remembered seeing a flyer from LendSquare and called Villarreal. Just like with the startup’s other funding drives — Pie Hole got the money it needed — all $30,000 of it.

The second location should be open in “the first quarter of next year,” Brandt said. "There's a lot of reassurance when you have the tangible support of the community.”

But while LendSquare might be a loan alternative, it is not free of risk.

Villarreal spent nine months researching the legal requirements of running a business like LendSquare, conferring with lawyers, which turned out to be the bulk of his startup costs, and had to limit his loans to the state of Illinois.

The loans are also unsecured, Villarreal said. If a business goes belly-up before paying back the loan, lenders are out of luck unless they want to hire a collections agency or file a lawsuit.

But the benefits outweighed the risk for Mike Crosby, of Edgewater. Crosby, a computer applications developer, invested $5,000 in Pie Hole's campaign, jumping at the opportunity to help fill what has been an empty storefront, he said.

"I know there's a risk of lending money, but I figured I could help a local business and at the same time also possibly increase the rate of return on my money," Crosby said. “I just saw it as a big win, all the way around."

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