Getting a business loan in this economy can be more difficult than landing a reservation at French Laundry in Napa, California. Now try selling the loan officer on an open source hardware project where the blueprints will be given away.

That's why the hardware hacking community is turning inwards to fund its ideas. Two open source hardware enthusiasts, Justin Huynh and Matt Stack, have started the Open Source Hardware Bank to fund hardware projects such as the microcontroller board pictured above.

The fledgling bank is funding only open source hardware projects using capital raised from other hardware geeks. It's like a community of Facebook friends borrowing and lending among themselves — a peer-to-peer bank.

"This speaks to the rise of the do-it-yourselfer, someone who is not just a consumer but also a producer, inventor and investor," says Huynh. "But someone also ought to be thinking about the money problem when it comes to open source hardware and we are doing just that."

The open source concept has traditionally been applied to software, but open source hardware is rapidly gaining ground. A fast-growing community of inventors is publishing the specs for a wide range of hardware, from CPUs and graphic cards to MP3 players and even a laptop. The idea is to let anyone take the designs, build on them, and profit from the work of the group — while contributing enhancements back to the community at large.

But open source hardware requires more financial investment than open source software. It isn't as easy as downloading a few open source programs on to your existing computer, explains Stack. "With open source hardware you don't get a finished product until you have put in some money," he says. For instance, there's the cost of the printed circuit boards, the solder and the components.

"To build open source software you just need to set up a project on Sourceforge," says Huynh. "But if you get open source hardware wrong, it burns a hole in the wallet."

The Open Source Hardware Bank, which isn't yet fully up and running as a federally regulated lending institution, allows those interested in open source hardware to make investments in specific projects, then (hopefully) reap returns ranging from 5 percent to 15 percent from the successful sale of the projects. For the creators, the bank offers funding that could bring down the costs of their project and give them the stimulus to try out new ideas.

"The way the bank works is the more you build, the cheaper it gets," says Stack, who in the true open source spirit first laid out the idea on his blog.

So far nearly 70 people have signed up as lenders for the bank. Huynh and Stack are managing the process through an Open Office Calc spreadsheet and an open source statistics program called R. They soon hope to bring it online through the Open Source Hardware Bank website that lists some of the initial projects that have been funded.

Lenders are offered returns based on a rolling six-month average so dud projects will be offset by sales of profitable ones. It takes just a few deals to strike it big, Huynh and Stack say, and because it is a community that is not just passionate but also knowledgeable, better projects are likely to get funded.

The promise of returns is enough to get former investment banker Andrew de Montille excited.

"I put money in the bank not because I consider it as a charitable investment," says de Montille. "Rather, I am very confident that some of the projects will do well enough to be profitable to the investors."

De Montille won't disclose how much money he's pumped into the bank but says it is "somewhere in the five digits." And the returns the bank offers is more than he can find anywhere else in this economy, he says.

"It can be a market-leading investment at this point," says de Montille. "Here the loans are being backed up by the actual product, rather than the credit profile of someone."

The bank borrows a page from the playbook of peer-to-peer lending sites such as Prosper and Zopa. Before the credit crunch squelched their dreams, the two sites offered borrowers and lenders a way to connect with each other instead of going to banks or other traditional credit institutions.

"There weren't people really speculating and profiteering off that model," says Huynh. "It was more about the community getting together and helping."

Huynh and Stack hope to bring a similar spirit to the Open Source Hardware Bank.

"Groups of people that have strong shared interest are really the perfect place for peer-to-peer financing to work," says Scott Pitts, former managing director of Zopa U.S. "As a group they are not out to make a billion dollars, they just want to fund their passion and do it in a sustainable way."

Huynh and Stack met at an event in New York and found a mutual interest in open source hardware. Huynh, a pharmaceutical consultant by day, is no open source hardware obsessive. But he has tinkered with open source electronics enough to realize that there's a need for more community-funded projects.

Finding the money to chase pet projects is a challenge for hardware geeks. The Open Source Hardware Bank hopes to help alleviate two main financial problems for DIYers: throwaway costs that result from repeated revisions to physical hardware during the design process, and the inability to take advantage of volume discounts for raw materials.

For every project that comes to the bank, the community will provide funds to build twice as many units as there are potential buyers. The move would double the number of pieces created and could reduce per-unit costs by around 10 percent to 30 percent.

A promising idea it may be, but in this case the geeks are likely to face serious opposition from the financial regulators, says Paul Kedrosky, angel investor and a senior fellow at the Kauffman Foundation, which focuses on entrepreneurship and innovation. The Open Source Hardware Bank founders don't have to flip the pages of history too much to see the fate of peer-to-peer lending ideas in the United States, points out Kedrosky.

Last year, major community lending startup Prosper was forced to shut down by the U.S. Securities and Exchange Commission for not registering with regulators.

"If I put money into a project and am offered some kind of return on a system-wide basis, that requires issuing a security," says Kedrosky. "Which means the open source hardware guys will have to go through the same kind of securities registration as Prosper was forced to."

Zopa's Pitts agrees that the Open Source Hardware Bank needs to figure out how to navigate through the financial rules of the U.S. market. "These guys do not have a regulatory strategy and they need one," he says.

The SEC regulations around peer-to-peer lending SEC issue aren't cut and dry. Prosper, for instance, was in business for nearly three years and made $178 million in loans before the SEC intervened. With the open source hardware bank, says Pitts, all depends on the kind of promises and the system that is built. Zopa did not have any SEC related issues as it created a quasi-community lending model and used credit unions as intermediaries.

Right now the Open Source Hardware bank is still navigating through these issues, say Huynh and Stack. Both say they are still trying to develop the idea and it is still far from its final shape. "One step at a time," says Stack. On Wall Street, the blood bath of the banks is likely to continue. But for the Open Source Hardware Bank, the doors have just opened for business, they say.

Pitts says they could make it work. "They have done a good job of articulating their goals and objectives so far," he says. "What they need to do is to figure out a way to make it work."

For more, see Liquidware Antipasto, the open source hardware blog that has details and updates on how the bank will work.

*Updated: An earlier version of the story incorrectly referred to an Excel spreadsheet being used by Justin Huynh and Matt Stack. They are using an open source program, Calc, instead. We regret the error.

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*Top Photo: Illuminato microprocessor that was partly funded by a group of open source hardware enthusiasts. *

*Side Photo: Open Source Hardware Bank Logo includes a wreath of resistors that are not completely connected, with 16 stars etched in hexadecimal to denote the number of initial investors in the bank. The little circuit in the middle is meant to evoke the back of a printed circuit board. *

Photos: Justin Huynh*/Matt Stack*