When it comes to startups and regulation, there’s the Uber way of doing it: charging ahead like a raging bull in an effort to force law makers to change their ways. Then there’s the Canadian way, which usually involves civil discourse and co-operation.
Lending Loop, when it launched its online peer-to-peer loan portal last year, first tried the Uber approach, but it quickly ran afoul of provincial securities regulators. Rather than ram onward, the Toronto-based company changed its tune and slowed its business down while working with regulators to come into compliance.
On Monday the company re-launched its service across Canada (except for Quebec) with the blessings of provincial regulators and a mission to change how loans are handled.
“We’re dealing with people’s money so there’s a huge trust factor,” says co-founder and chief executive Cato Pastoll. “You don’t have to go the Uber route to be successful.”
Lending Loop effectively turns anyone who wants to be one into a bank. Individuals can sign up to become investors in small businesses, who in turn come to Lending Loop looking for loans.
Like a bank, the company assesses each company’s loan needs and application. Key criteria are whether the business has been operating for a year or longer and whether it has more than $100,000 in annual revenue.
If approved, Lending Loop sets the interest rate and term length for repayment, then publishes the loan on its website. Individuals who have signed up to become investors can then browse businesses, much they would look for a mate on a dating website, and pick which they’d like to loan to. Loans can be any size, in $25 increments.
Repayments, which include a blend of the original loan principal plus interest, begin the next month and recur on a monthly basis until the loan’s term ends.
Lending Loop charges businesses 3.5% interest up front and investors a low single-digit fee.
Pastoll says peer to peer loans have a number of advantages over banks and other alternative lenders. For one, it’s faster – businesses typically get their assessments back in a few days. It’s also cheaper, with interest rates usually ranging from 8 to 12%.
Peer to peer loans are also appealing to investors because they give them a more predictable source of income, provided that they spread their risk over many loans, Pastoll says.
“You know what your monthly payments will be. It’s a lot more stable than public equities, where you can’t know where you’re going to be six to 12 months down the road.”
Peer to peer lending has taken off in other countries. The U.S. market generated $8.8 billion in peer to peer loans last year, while the U.K. saw a similar result of $2.7 billion. British banks are even starting to refer businesses that don’t qualify for their loans to peer to peer lenders.
Canada is behind, Pastoll says, because of the conservativeness of local regulators. That staunchness has its benefits – Canadian regulators are widely credited for helping the country stave off the worst of the recent global financial crisis – but it also impedes regulation in financial markets.
Lending Loop, which has five employees and has been operating on private seed funding raised last year, halted new loans in March. That followed a public notice from the Ontario Securities Commission last year that urged lenders to ensure their operations were in compliance with rules governing securities.
At issue for the startup was the fact that it allows unaccredited investors to lend money, which could have qualified the company as a securities dealer. Anyone dealing in securities must prepare an extensive prospectus that is then approved by regulators.
Pastoll says the company spent six months completing the necessary paperwork and is now a registered dealer with an offering memorandum in every province except for Quebec, where it doesn’t yet operate because of the language difference.
“We figured out a model that would work for us and that would work for them,” he says. “In a sense you’re trying to fit a square peg into a round hole, but through working together, we’ve been able to achieve that.”
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