In a Nutshell: As the first international blockchain-based P2P lending platform, Karma offers significant benefits to both lenders and borrowers. Through the platform, entrepreneurs can avoid high interest rates, exclusionary regulations, and drawn-out lending processes. And investors can make safe, educated lending decisions thanks to Karma’s rating system and the security and transparency of the blockchain. Karma offers an efficient, community-based way to help entrepreneurs secure the working capital they need to fuel economic growth.
When you think of borrowing money, you may imagine walking into a bank, sitting down with a loan officer, and filling out pages and pages of paperwork. And, traditionally, that is how the system has worked. Investors deposit money in financial institutions and rely on the expertise of the finance company to invest it and earn returns.
And that is the same process entrepreneurs typically experience when they need to borrow operating capital — although the stack of paperwork is higher and the wait for approval is longer.
But technology has transformed that process. Peer-to-peer (P2P) lending services now allow investors to connect directly with borrowers, with the platform’s experts supplying the insight previously provided by the banks. This approach offers an attractive alternative, allowing investors to leverage their own knowledge to make decisions.
P2P lending platform Karma innovates this funding model further by granting both investors and borrowers even greater autonomy.
“Karma was started back in 2014 as a mutual fund of investments doing Small-to-Medium Enterprise (SME) loans. We were just a small investment management team that created legal frameworks and documents,” said George Goognin, Founder of Karma.
Based on Goognin’s experience applying for loans to grow one of his own businesses, he and the Karma team saw great potential to disrupt the traditional lending market. Today, Karma is the world’s first international, blockchain-based P2P lending platform.
Karma directly connects SMEs to a global pool of investors. Free of intermediaries, SMEs benefit from lower interest rates, investors earn higher returns, and both enjoy greater flexibility. Obtaining funding is also faster than through a bank loan, and fees are lower — typically about 3% of the transaction value.
Karma leverages blockchain for transparency and security, and fiat currency for raising and withdrawing funds. For internal transactions, the platform uses Karma tokens (KRM), making it easy for private investors to join the ranks of Karma’s more than 10,000 members worldwide.
P2P Borrowing Bypasses Traditional Loan Obstacles
SME loans can often be a headache for both banks and borrowers thanks to the standard litany of prerequisites.
“If you’re a small entrepreneur, it’s hard to get a loan if you don’t have the collateral,” Goognin said. “Karma offers an opportunity to have some leverage if you don’t meet the criteria of the regular banks.”
Goognin encountered that lack of leverage in 2013 when he tried to obtain a loan for one of his businesses. His enterprise was profitable and transparent, and he was current on the company’s taxes. But of the nearly 50 loan requests he sent out, Goognin received no response to most. The banks that did respond either declined or wanted collateral in the form of real estate worth double or triple the value of the loan.
Inspired by these difficulties, Goognin and the Karma team decided to leverage the cryptocurrency boom of 2017 to expand the company’s user base and attract investors. Karma’s token sale raised some $10 million. That success empowered Karma to provide a lending alternative to SMEs in countries with high interest rates, tedious application processes, and regulations that functionally exclude them from funding.
Karma conducts all cross-border money transfers in-house and handles operational details with lenders. That process allows SMEs to focus on business so they can continue to raise capital.
“We see that a lot of borrowers who have been successfully raising money through our P2P platform over a few years grow, become more mature, and then they go to the bank and apply for loans with much better terms and conditions,” Goognin said. “Our platform has helped them to bootstrap and thrive in those first, most difficult years of their business.”
Funding Scores Help Investors Make Educated Decisions
Karma has its own scoring system that helps remove the obstacles standing between SMEs and investors. Each funding request is first checked by the AI-scoring system with dozens of connections to the public databases. Then it’s reviewed and rated by multiple independent experts. In Goognin’s opinion, this provides a more reliable evaluation than traditional credit scores or the in-house methods of analyzing investments used by other P2P lenders.
“Every country has its own version of the FICO score, and it’s a headache if the investor would like to invest in another country,” Goognin said. “It’s totally opaque, and it’s hard to investigate what’s going on and the creditworthiness of the borrower in another country.”
Each Karma investment opportunity is rated based on several factors. One of these is the borrower’s reputation within the Karma community. Another is loan collateral, which includes real estate, vehicles, and equipment. Karma also uses a smart scoring system that evaluates the applicant’s financial condition, business experience, education, and more than 30 other parameters — all automatically re-evaluated monthly.
To apply for funding through Karma, a business must have maintained operations for two to three years and have demonstrated its profitability. Collateral, conditions within the particular industry, potential for growth, and the financial and legal track record of the company — as well as those of its CEO and shareholders — are also taken into account.
“If the CEO cannot negotiate with his partners or his subcontractors or clients, we may be a bit reluctant to advertise him as a reputable option to potential investors,” Goognin said.
Funding SMEs in Less Time than Traditional Banks
Companies will also need to pass a Know Your Customer (KYC) test when applying for funding through Karma. These tests are common on cryptocurrency platforms, and they ensure transactions are conducted legally and only with reputable individuals. KYC tests typically require proof of identity, nationality, and residence to prevent identity theft, money laundering, and other serious crimes and frauds.
It takes borrowers an average of two to three days to complete Karma’s application process. After that, the Karma team will prepare a customized landing page for the borrower designed to attract potential investors. In addition to a written description, the company’s profile may include videos and photographs, as well as other text such as interviews — which Karma conducts both online and in-person.
Goognin said that borrowers can expect to receive funding one to two weeks after approval, with the entire process taking about three weeks. That is in sharp contrast to the application process and waiting period for a bank loan, which can take up to several months to return a funding decision. This alone makes Karma a better option for enterprises that need to raise operating capital quickly.
After paying off a loan from Karma, companies can enjoy an even more streamlined borrowing process in the future. They won’t have to pass the KYC test a second time; they can simply apply for a new loan. And based on their performance and repayment of previous loans, their reputation in the Karma community can rise, making them more attractive to investors and further expediting the funding process.
“Every loan gets easier and easier,” Goognin said.
Decentralization is the Foundation for Global Economic Growth and Prosperity
Karma’s lending model embodies a bold vision of the future of P2P investing. By decentralizing the P2P community, Karma may eclipse centralized P2P lending platforms.
Participants will act as the experts, with the reliability of their expertise established by community ratings and their reward is a share of the revenue earned through loan repayment. Insight and information will no longer be drawn from a small, localized pool but from an international community of active, experienced participants.
P2P platforms have already laid the groundwork for this sort of system by allowing investors to exercise their individual competencies. The new paradigm of P2P lending will include independent — rather than institutional — involvement by guarantors, analysts, legal experts, and other participants whose community rating and reputation ensure reliable expertise and insight.
By expanding the flow of capital across international borders and bypassing centralized lending institutions, SMEs can secure funding that falls outside of standard regulatory criteria. That can mean greater access to funds, and also provide investors with greater opportunities, more discerning insight, and increased security through crowdsourcing.