Canadian investors now have the opportunity to help small established businesses get off the ground, courtesy of a peer-to-peer lender. Although peer-to-peer lending isn’t new in Canada, the concept of giving retail investors the opportunity to participate in the process is new. Toronto-based startup Lending Loop is letting individual investors participate with as little as $50.
Besides banks and other large lenders, accredited investors—those who earn more than $200,000 annually or have more than $1 million in assets—are usually only allowed to offer loans.
“You do not have to be an accredited investor in order to participate,” explains Mark Cohen, Lending Loop’s director of growth. “Lenders can make an educated decision on where they would like to allocate their respective funds.”
The company provides a full profile for all businesses outlining what they do, what they’ll be using the loan for, and a high-level overview of their financial performance over the past two years and year to date. Loans of between $5,000 and $500,000 are available to fund.
The peer-to-peer marketplace went live in September and funded its first business loan, helping to finance a $50,000 small business loan.
For borrowers, the process is easy. It takes under 30 minutes to apply and Lending Loop’s analysts will provide a response within a few days. The loan is then listed on the marketplace and it’ll have up to 30 days for lenders to fund the loan.
To protect lenders, Lending Loop uses a funding model where loans only come into effect if the borrower receives the full amount of their loan request. The company says ensuring a project or business is fully funded improves the likelihood a borrower will be in a better position to repay lenders.
For lenders, they’ll be able to receive annual investment returns of anywhere between 6% and 15.5% over a six-month to five-year period. While the returns aren’t guaranteed, they’re higher than high-interest savings accounts and GICs, which currently offer rates of anywhere between 1% and 2.5%, depending on the time period. Lenders get paid back a combination of principal and interest every month whereas a GIC pays you the principal plus interest upon maturity.
Small businesses often have trouble getting access to funding. Even a highly profitable company with strong sales growth won’t be able to get financing from a lender, especially if it doesn’t have assets to use as collateral against the loan.
“We’re servicing a very underserved market,” he says, noting there are a lot of small businesses across the country and that’s where the opportunity lies.
According to Industry Canada, there were nearly 1.1 million small businesses in 2012 with employees (excluding self-employed entrepreneurs). And small businesses employed more than 7.7 million people in Canada, or 69.7% of the total private labour force.
Cohen says Lending Loop gives investors access to simple and attractive returns while supporting the growth of small local businesses and the Canadian economy. And the loan also diversifies their portfolios beyond the financial and real estate markets, he explains. “It provides a new, transparent, fixed income for lenders to participate in—one that they never had access before.”