Colin Henderson’s new business is an eBay-meets-the-banks website that could offer quick relief to cash-strapped Canadian entrepreneurs. The need is there. The website is ready. And similar services are doing brisk business in the U.S., U.K., Italy and Japan.
Too bad regulators had to get in the way.
Henderson, a former director of channel management with Bank of Montreal, is counting on Canadians to embrace peer-to-peer lending when — or if — the Ontario Securities Commission finally lets CommunityLend.com open its virtual doors.
“We’ve been working with [the OSC] for about 18 months, and it’s obviously a fairly novel thing for them,” says Henderson, co-founder and chief technology officer of the Toronto-based startup.
Indeed, the idea of online peer-to-peer lending is new to just about everyone. Here’s how it works. Joe needs $20,000, so he posts a request for that amount, the top interest rate he’ll pay, his use of proceeds (e.g., a new truck for his contracting company) and any information demonstrating his ability to repay the loan. Then individuals pledge the amounts and interest rates they’re willing to offer; the aution ends when the loan request is fully funded, with the lucky “winners” being those lenders offering the lowest rates. The P2P website’s operators not only host the auction, but handle the resultant transactions — including debiting Joe’s bank account each month and forwarding the cash to his creditors. For its effort, the P2P site charges a small percentage fee on loans.
Why play the P2P lending game? The assumption is that borrowers have been turned down by traditional lenders, and P2P lenders are looking for way-better-than-market returns. In one recent transaction on U.S.-based P2P loans site Prosper.com, 347 individuals lent one entrepreneur $15,000 in amounts ranging from $50 to $300, repayable over three years at an annual interest rate of 22.49%. (Take that, index fund!) Lenders typically spread their loan portfolios in small amounts over multiple borrowers to manage their default risk.
Although P2P lending sites such as Prosper.com and U.K.-based Zopa have been operating since 2005, the idea has yet to fly in Canada. Montreal-based IOUcentral.ca opened last February, only to be shut down two weeks later by Quebec’s securities regulator for reasons including the distribution of debt securities without a prospectus. The OSC declined comment for this story, but Henderson feels the regulator is simply doing due diligence to ensure CommunityLend complies with the law. He hopes to secure approval to launch within the next six to eight weeks.
That could be a great thing for entrepreneurs, particularly those using credit cards to make payroll or purchase new equipment. “I think the regulations here are far too strict to launch peer-to-peer lending groups,” says Andrew Patricio, co-owner of BizLaunch Media Inc., a Toronto-based business-training firm. “But as a concept for small business, I think it’s absolutely brilliant.”