The recent turbulence in stock markets and the broader US economy heralds a recession for the average American’s finances, prompting him to rely even more heavily on the hundreds of billions in interpersonal loans made between family and friends each year. However, lending money to friends and family is complicated and risks straining and breaking relationships. pigeon loan, a consumer fintech startup founded by Kaben Clauson and Brian Bristol, uses technology to make lending to loved ones a financially and emotionally seamless process. The Miami, Fla. based startup raised $2.5 million from Y Combinator, FundersClub, Kleiner Perkins Scout Fund, Sovereign’s Capital, Goodwater Capital, SaxeCap, Pareto Holdings, True Culture Fund, Magic Fund, Legal Tech Fund, Mentors Fund and Ascendo Venture Capital, and various angel investors.
Jahanzeb and Ashley Sherwani, Angel Investors at Pigeon Loans, say, “Pigeon Loans is the ideal use case for technology: It empowers people to meaningfully serve the people they care about, while providing accountability and trust to ensure that everyone is on the same page. By encouraging people to stay on track when it comes to repayment, it creates a win-win situation for everyone involved, and that’s the kind of impact we wanted to be a part of.”
“Predatory lenders target borrowers who are looking for small loans and are vulnerable to falling into the trap of high interest rates and fees. Pigeon Loans helps people avoid falling into the trap by allowing a borrower to get a loan from friends and family,” said Ash Shrivastav. an early advisor and investor in Pigeon Loans.
Friedrich Daso: What psychological and interpersonal barriers are encountered when lending money to friends or family?
Caben Clauson and Brian Bristol: Lending to friends and family has always been viewed with skepticism in the United States. America’s ethos of self-reliance leaves many borrowers embarrassed or ashamed that they have to ask for money. In other countries around the world, the sense of community makes it easier for this type of lending to become commonplace. The “independent streak” of many Americans has kept much of the $200 billion-a-year “friend and family loan” market under the radar.
The fear of losses on loans between friends and family can be quite high. We’ve spoken to hundreds of lenders who have not been repaid on time or whose relationships have deteriorated because money drove a wedge. The truth is that without good planning, interpersonal loans often ruin friendships.
Both parties need a clear plan for repayment in order not to ruin a friendship. Setting the right expectations seems to be the key to this success.
daso: How dependent is the average American on borrowing money from family and friends?
Clauson and Bristol: A recent feature in Bloomberg cites that nearly 27 million Americans depended on loans from friends and family in 2021. In 2020 it was almost 20 million. These loans are expected to increase dramatically as record inflation and consumer debt take their toll. The increase in lending to friends and family has disproportionately come from minority communities, who often have less access to the traditional lending system.
daso: How does the borrower usually spend the money for interpersonal loans made under $1000? On average, how quickly is the money repaid to the lender?
Clauson and Bristol: Loans under $1000 often fall into the “emergency” category. These loans are often used to repair the car someone needs to get to work or to cover short-term housing expenses. With more Americans living paycheck to paycheck than ever before, we’re seeing many turning to friends and family to help overcome a financial surprise.
Going to friends and family is usually the best option to get the money you need quickly while avoiding payday lenders charging high interest rates.
daso: Aside from the financial organization and structure that Pigeon Loans offers the lender and borrower via technology, how is the product designed to address the psychological and interpersonal challenges of lending money to someone in their life?
Clauson and Bristol: As founders of Pigeon Loans, Brian and I have experienced firsthand the awkwardness of both borrowing and lending for those we know.
First of all, our product helps both parties to understand how payments are made and on what schedule. Good planning will help solve most of the problems with this type of loan.
Second, the system then gently reminds borrowers to make payments on time, helping our lenders avoid the awkward monthly “Hey, when are you going to send me the money?” message.
We also have a robust training center that guides both lenders and borrowers through best practices for dealing with late payments and defaults and managing a healthy relationship. The presence of a third-party software system greatly reduces the cumbersome nature of this type of lending.
daso: Aside from the complementary professional experiences of your co-founding team, what are your respective personal experiences of lending and how has it shaped what Pigeon Loans has become today
Clauson and Bristol: Kaben watched as his family borrowed heavily during the 2008 financial crisis. The pain of dealing with financial losses and then managing those loans for years always seemed like a problem that needed solving. As he got older, he borrowed money to start my first startup. Without the support of family and friends, I would never have been able to achieve my professional dreams.
During the pandemic, Brian was asked for a significant amount of money by his family. He wanted to help, but didn’t want the headache of managing that loan over the years. Needing a solution to automate these loans as much as possible, he set about building V1 of Pigeon Loans.
daso: What is an aspect of the story of your startup that many do not yet know?
Clauson and Bristol: Not many people know that Pigeon Loans recently changed their business model to make our lending tool completely fee-free. We believe that the economic problems experienced by many of our users should not be increased in the form of fees. The best way to monetize the tool we have developed is to provide our clients with recommendations on other fintech products and services that can help them advance their financial journey. This business model allows us to serve the largest possible number of users in a way that promotes a better financial future for them and their families.