While Sir Richard Branson is probably best known for his taste for adventure and his position as the founder and chairman of Virgin Group, Ltd., the British entrepreneur’s latest venture, Virgin Money USA, is aimed at giving many future small business owners a chance at success that they may not have otherwise. Like most entrepreneurs who need to finance a startup, Branson had to borrow money from a family member when he first started out in the record business. This experience taught him that loans from family or friends have numerous emotional risks and pitfalls that could destroy important relationships if there is no concrete agreement as to how exactly the loans should be repaid.

Virgin Money USA, formerly Circle Lending, gives small business owners the opportunity to borrow money from family and friends rather than through traditional lending avenues such as a bank. This is referred to as social or peer-to-peer lending, which is growing at a phenomenal pace on the Internet as people look for alternative ways to acquire funds, according to new research by Javelin Strategy & Research. Their research found that the top three reasons why people use social lending is for the better interest rate, the ability to avoid using credit cards, and because they do not qualify for a traditional loan from a bank or credit union.
As more small business owners are forced to deal with the credit crunch, social lending is starting to look like a viable option for many startups, according to Asheesh Advani, CEO of Virgin Money USA. Advani identifies Virgin’s ability to set up all of the payment arrangements so as to alleviate any awkwardness between family and friends as one of the best benefits of using their loans.

“Let’s say that a guy wanting to start a sports bar goes to his uncle and asks him for a loan,” Advani said. “He says, ‘Sure, here is $25,000; you can pay me back in three years.’ If the business owner wants to take a family vacation to Hawaii and spend $5,000 after the business has taken off, the uncle may say ‘How can you spend this money for a vacation when you haven’t begun paying me back for the loan I gave you?’”

If the nephew had a payment plan with clear expectations, the relationship would be much more stable, according to Advani. If he had used Virgin Money, the nephew would have already paid back 1/3 of the loan and the communication would have been much clearer between the two. Another benefit is that business owners can create a deferred repayment, which means that they won’t have to make their first payments immediately after they get the loan; they can start paying it back about a year after their business gets off the ground.

Bette Yip of Massachusetts had never considered opening her own business until two of her clients offered her a loan using Virgin Money. She used the money to open Picture Perfect Pets just outside of Boston in 2000.

“They encouraged me and told me that they knew of this great process that we could use for the loan,” Yip said. “They never gave me the opportunity to say no.”

Yip agrees with Advani that the credit crunch is making it difficult for many aspiring entrepreneurs to launch their startups. “As a result, I expect that options like this will become more popular for borrowing money in the near future,” she said.

It takes one to three days to acquire a loan from Virgin Money USA. The cost is $199 for a standard business loan and Virgin charges $9 per payment. For more information, visit virginmoneyus.com.