When you lend money, you may lose all or some of your principal. You should be aware of the different types of risk and find the right loan option for you, with respect to repayment risk and social return.

Lending to the poor online can involve 3 levels of risk.

Each entrepreneur is screened by a local eMicrocredit Partner Company before being posted on eMicrocredit's website. The Partner Company looks at a variety of factors (past loan history, village or group reputation, feasibility of business idea, etc) before deeming the entrepreneur as credit worthy.

However, a number of factors can result in entrepreneurs defaulting:

• Business issues (e.g. crop failure)
• Health issues (e.g. malaria, HIV/AIDS)
• Other issues (e.g. theft, paying for other items over repayment, etc)

If a default occurs, eMicrocredit's policy requires our Partner Companies to be fully transparent about the reason(s) behind it.

When you lend to an entrepreneur, eMicrocredit wires the funds to the local Partner Company to administer your loan. While this necessary intermediary increases the likelihood that your loan will be effectively used and repaid, new risks are introduced:

• Bankruptcy (e.g. the Partner Company may go out of business and be unable to collect your loan)
• Fraud (e.g. staff members at the Partner Company may embezzle funds)
• Poor operations (e.g. The Partner Company may have poor methodologies for screening entrepreneurs or collecting repayments)

To help you assess this risk, eMicrocredit assigns each Partner Company a 1 Star (high risk) to 5 Star (low risk) Risk Rating.

When lending internationally, it is important to consider "macro-level" risks:

• Economic (e.g. a large currency devaluation renders the Partner Company's local currency collections valueless for you).
• Political (e.g. eMicrocredit works in Iraq, Afghanistan and other unstable areas. Funds repatriation may be difficult if central government policy changes)
• Natural (e.g. a tsunami or flood may greatly reduce the likelihood of loan repayment.

Partner Companies are the critical on the ground link to entrepreneurs. Each entrepreneur requesting a loan through eMicrocredit has successfully completed an application process conducted by a local organization. These organizations have entered into a Partnership Agreement with eMicrocredit to become one of our Partner Companies, who are responsible for the distribution and collection of your loan.

eMicrocredit Partner Companies work in impoverished areas to screen and approve entrepreneurs who demonstrate a need for a loan and a reasonable likelihood of repayment. Over the last 30 years 100 million entrepreneurs have been reached by such organizations and data suggests that the poor can be quite credit worthy (+95% repayment rates) if the Partner Company employs the proper screening methodology.

One common methodology is to lend to entrepreneurs who belong to a borrowing group (e.g. a group of 5 women from the same village who know each other well). Loans to one member of the group are contingent on the other group members repaying on time. Because each member's livelihood depends on other members' repayment, a form of peer monitoring and support develops which helps ensure high repayment rates.

Loans directly to individual entrepreneurs are also common, especially as the entrepreneur proves their credit-worthiness in a group setting.

When you lend to an entrepreneur, eMicrocredit wires the funds to the local Partner Company to administer your loan. Partner Companies disburse the loan to the entrepreneur and after a grace period begin collections. Typically, loan officers will travel out to the entrepreneur's location (e.g. rural village) and collect a repayment on a monthly basis. Most of the time, entrepreneurs are able to pay the loan officer on time the full amount due without any issues. On occasion, an entrepreneur may be late in payments. Once funds are collected, the Partner Company wires funds back to eMicrocredit and eMicrocredit automatically distributes the repayments to each lender.

When lending funds across national boundaries, an implicit risk exists with currencies changing relative to one another. The local currency in the Partner Company's country of operation may, for many reasons, lose some of its value relative to the USD, thus requiring the Partner Company to use more of its local currency to reimburse eMicrocredit (eMicrocredit’s working currency is the US Dollar).

As a means of encouraging responsible lending, eMicrocredit offers Partner Companies the option to protect themselves against these currency fluctuations. In cases where the US Dollar appreciates by more than 20% relative to a local currency, Partner Companies who opt for currency exchange loss protection will only be responsible for covering the first 20% of the local currency cost of appreciation while lenders will cover the remainder of the cost.

This ensures the sustainability of the Partner Company in difficult economic climates and allows the Partner Company to continue funding local entrepreneurs.

In addition to loan screening and administration, Partner Companies document the impact of your loan in blogs. Blogs provide insight into the entrepreneur's progress and challenges. It is a key point of connection between eMicrocredit's lenders and their business partner across the world.

eMicrocredit screens, rates and monitors each Partner Company. eMicrocredit's staff works to create a highly transparent, data rich lending platform for the poor. eMicrocredit's main role besides operating a website is to screen, rate and monitor each Partner Company — who in turn are responsible for screening each entrepreneur listed on the site and administering your loan.

Each Partner Company has a different risk profile — some are highly established with a proven track record and others are young and unproven — but with the potential to reach entrepreneurs not reached by more established Partner Companies. eMicrocredit hopes that an online lending platform will let unproven, riskier, Partner Companies build a great reputation through long term performance. In the process, they should be able to raise capital from other sources beyond eMicrocredit to serve more of the poor in their area.

New Partner Companies must meet eMicrocredit's Minimum Requirements in order to fundraise for local entrepreneurs on eMicrocredit's platform:

• Have a mission of lending to the poor for a social purpose with interest rates that are significantly discounted versus alternatives for the local poor.
• Be able to accept US dollar denominated debt capital from US lenders and manage a reasonable degree of currency risk.
• Provide eMicrocredit with legal incorporation registration documents recognized by the local government.

Once the Minimum Requirements are met, each Partner Company is given a Risk Rating. A eMicrocredit Risk Rating is a 1-5 star rating assigned to each Partner Company by the eMicrocredit Staff. This rating reflects the estimated repayment risk associated with each partner according to the evidence described below. A 1 star rating indicates very limited evidence supporting a Partner Company's repayment reliability, and a 5 star rating indicates very significant evidence supporting a Partner Company's repayment reliability.

Evidence – not driven by eMicrocredit – supporting a Partner Company's repayment reliability

• Recent Financial Audits, Credit Ratings and Independent Evaluations
• Most Reputable Outside Funders and Network Affiliations
• Organizational Age and Sustainability
• Existing Loan Portfolio Size and Risk

eMicrocredit works with leading Microfinance Industry experts to constantly improve its Risk Rating Model and with Partner Companies to improve data quality / integrity.

Evidence – driven by eMicrocredit – supporting a Partner Company's repayment reliability

eMicrocredit Repayment Performance over time: Like other online marketplaces, eMicrocredit incorporates the long term repayment performance of each Partner Company into their Risk Rating — allowing less established Partner Companies to build their reputation online.

Bank Statement Reviews: For select Partner Companies with lower Risk Ratings, eMicrocredit monitors the bank statements in order to verify the flow of funds and note any major discrepancies

The amount of money a Partner Company can raise each month for local entrepreneurs on eMicrocredit depends on their eMicrocredit Risk Rating. A well established 5 star Partner Company can post over $100,000 of loan requests to eMicrocredit's website each month while a less established 1 star Partner Company can post less than $10,000 each month. However, as a 1 star Partner Company proves itself over time, its Risk Rating will increase — which in turns increases its monthly fundraising limit.

eMicrocredit routinely audits and monitors each Partner Company. If eMicrocredit audit uncovers funds mismanagement, eMicrocredit will make this transparent on the website and take appropriate actions to resolve the issue, including possible partnership termination and legal action in the case of gross funds mismanagement.