The site combines aspects of localized microlending and social media, connecting consumers with entrepreneurs to help the businesses raise small amounts of working capital. The difference between Cogster and peer-to-peer lending sites like Prosper.com is that instead of getting an equity stake in the company, the consumers receive gift certificates for goods and services as the return on their investment.
The idea draws on many influences, including Prosper and microlender Kiva, as well as services such as Groupon, a website that promotes localized daily deals. But Bisbee, who most recently was a vice president at the builder S&A Homes Inc., made it clear that Cogster, of State College, Pa., is not a lender.
"This is a prepayment of goods and services," he said. "Our goal was always how do we inject capital into mom and pop, legally, without being a bank and without going through the legality of it being a security. … We never had the goal of placing a debt burden on the company. We wanted the capital to be associated with customer flow."
Since the site launched in June, nearly 80 businesses and close to 1,000 consumers have registered. A total of $22,975 has been raised for member businesses so far. The service is only available in a handful of towns in northwest Pennsylvania surrounding Pennsylvania State University. But Bisbee hopes to take the service national as soon as possible and is looking for "strategic partnerships" to help him do that.
Cogster works like this: Businesses and consumers sign up to become members of the site for free. Businesses set a financial goal they'd like to reach by a certain date and consumers choose which businesses they'd like to support. Consumers can contribute to a business' campaign with as little as $10. There are different contribution options, each earning "dividend certificates" over time.
Most businesses offer the "Double Money" option in which a consumer instantly receives a gift certificate to the business he or she contributed to in the amount of the contribution that must be redeemed within 30 days. The consumer will receive another certificate worth 50% of the contribution 30 days later, and 30 days after that another certificate worth 50% will be issued. Both of those certificates must be redeemed within 30 days of receipt as well.
It's a concept that analysts said has potential to take off. "There's definitely some interesting elements there," said Edward R. Woods, a principal at Mindful Insights LLC, a financial services advisory firm in Portland, Ore. "I think one would consider a message like this irrespective if they can get lending at a good rate because of the notion of connecting with consumers, brand awareness … just the whole notion of being in the social game."
Small-business lending has declined during the crisis as banks rein in their lending standards. But at the same time, demand for traditional commercial loans has been tepid as businesses buckle down and avoid taking on more debt. The Federal Reserve Board's July survey of senior loan officers found that lending standards on commercial and industrial loans to small firms eased for the first time since 2006. Demand for C&I loans from businesses of all sizes was still weak.
In the Cogster.com model, the business raising money isn't taking on debt, and the benefits are more than monetary, Bisbee said.
