How Did the 0% Kiva Zip Loans Perform?

How Did the 0% Kiva Zip Loans Perform?

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Kiva Zip is a non-profit organization for loan-seeking entrepreneurs to crowdfund business loans at 0% interest rates. The borrowers are generally small and less established businesses that do good in their community but are unbankable, and the lenders are any philanthropic-minded individual willing to lend as little as $5 to a particular business.

Before a borrower can post a loan to Kiva Zip, they apply through the Kiva Zip website. Kiva will connect the borrower with a trustee. The trustee needs to write an official endorsement for the borrower after getting to know him/her. Kiva Zip will review the final application, and approve the borrower primarily based on his or her character and references, very different from the traditional method based on personal credits and financial strength.

We have contributed to over 230 Kiva Zip loans over the past 2 years in a variety of different industries and stages of development. Most of these loans are currently being paid back, but a number of them have defaulted or are delinquent.

Kiva Zip does not publish any numbers regarding the default rates on their loans. We suspect this is because, at a 0% interest rate on a crowdfunded loan with no collateral for less established businesses who don’t have strong financials, the default rate could be quite high. Lending to Kiva Zip borrowers is largely a philanthropic gesture. Thus default rate is less of a concern for a philanthropic minded lender. Lenders do take the loss if the borrower failed to repay back the loan.

We think it will still be interesting to quantify what USA Kiva Zip loans’ repayment rate will be as these are high risk borrowers with strong intent to repay and a sense of community. To discover on our own what Kiva Zip default rates are like, we dove deeper into the 120 loans we have contributed towards funding. Here is what we found.

Default Rate Breakdown

We contributed to 120 loans that were disbursed on or before June 17, 2014, exactly 1 year ago. Of those 120 loans, 6 of them were late by less than 30 days and 16 of them defaulted or were over 30 days late. That makes the default/delinquency rate 13.3% on loans in funding for at least 1 year. This is pretty high in comparison to Ondeck, where the loss rate is about 7 cents on a dollar — but again, the individuals on Kiva Zip are generally ones that might not qualify for not even a short term lender like OnDeck.

What are the industries at risk of default?

Here is a breakdown of the 16 defaults by industry.

Industry Number of Businesses in Industry % of Total Businesses Number of Defaults % Within Industry that Defaulted
Food Production 41 34.2% 5 12.2%
Agriculture 25 20.8% 1 4.0%
Restaurants/Caterers 22 18.3% 4 18.2%
Other 32 26.7% 6 18.75%

Restaurants/Caterers along with Food Production businesses are the most at risk industries. The food industry is characterized by razor thin profit margins (see more information from an expert here), so this makes sense that the default rate is higher. The “Other” category proves a high default rate. These defaulted businesses include retail businesses, clothing/jewelry businesses, a construction/contractor, services, etc, most of whom were newer businesses (less than 3 years in business).

The agriculture industry proves to fare very well with only 1 default out of the 25 agriculture businesses we looked at on Kiva Zip. We found that of the agriculture businesses towards which we have contributed, there was a disproportionate number of business that had at least 3 years of operations under their belts, a factor that may contribute bias towards this low default rate.

What are the common stages in which businesses default?

Here is the breakdown of defaults in each of the age categories.

Industry Number of Businesses this Age % of Total Businesses Number of Defaults this Age % Within Age Range that Defaulted
< 1 year 48 40% 7 14.5%
1 – 3 years 27 22.5% 5 18.5%
3 – 5 years 22 18.3% 2 9%
5+ years 23 19.2% 2 8.7%

As we can see, 75% defaulted businesses are less than 3 years in business. A high percentage of businesses within age ranges less than 3 years defaulted, while for age ranges 3 – 5 years and 5+ years, the percent within the age range tends to taper off. These numbers confirm the fact that as businesses gain more experience and establishment, they are less likely to fail.

Summary

Kiva Zip is a very young and interesting program. Their repayment statistics are not bad considering that 50+% the borrowers we observed here are high risk categories like restaurants or food production and 50+% of them are young businesses that are less than 3 years old. Compared to the SBA loans that are originated prior to the financial crisis, the default rate is actually not bad. Of course the default rate is still so high that it’s hard to provide the same set of borrowers a for-profit market rate loan product without charging super high APRs. It’s interesting to see how Kiva Zip will evolve over the next few years and we will report back their repayment statistics as we get more data from our investments on Kiva Zip loans.

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About the Author — Lydia serves as Content Manager for Nav, which provides business owners with simple tools to build business credit and access to lending options based on their credit scores and needs.

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