September 26th, 2018
Startup bringing peer-to-peer lending to Canada this fall
The Globe and Mail | CLARE O’HARA | Sep 11, 2015
Canada’s first peer-to-peer lending platform is set to launch this fall allowing Canadian investors the opportunity to fund small local business ventures.
Peer-to-peer lending has been a controversial issue within the Canadian marketplace, with many providers opening their platforms only to institutional and accredited investors. (An accredited investor generally has to have minimum individual income of $250,000.)
But a new online lender – Lending Loop – will open its doors to allow Canadian investors with as little as $50 to participate in its online lending platform.
Lending Loop allows small businesses to apply online for business loans up to $500,000. Once approved, businesses are added to an online marketplace where individual investors can peruse the online shelves for investing opportunities.
Before handing over any cash, investors are able to see a company bio, the amount of the loan requested by the business, the reason for the loan and the amount of interest the business will be paying to acquire the loan. Putting all your eggs into one basket is frowned upon by the online provider and investors are encouraged to spread their investment across multiple businesses to diversify risk.
“The more businesses you lend to, the more you are spreading your risk and the greater chance you have of earning a positive return,” says Cato Pastoll, chief executive officer of Lending Loop. “In terms of investor education, we prioritize in advising investors about the role of diversification on our platform.”
The big incentive for investors will be the potential for robust returns – which will be 1.5 per cent less than the borrowing rate (which varies between 6 per cent to 15.5 per cent). There is no maximum amount an investor can loan, although individual investors are not permitted to fund an entire loan for one business to lessen the degree of risk involved. Investors will contribute along with other investors to make up the total amount a small business is requesting.
For investors forking over the cash it can be a risky investment product. The loans can take anywhere from six months to five years to repay. Investors receive monthly blended interest and principal payments. If a business ends up defaulting on the loan there is no guarantee on your principal amount.
For that reason, Lending Loop tries to determine the creditworthiness of the business before approving them as a borrower. Businesses must be operating for at least two years and currently have greater than $200,000 in annual revenue.
In the United States and the United Kingdom, peer-to-peer lending has been operating for almost a decade with online providers matching up individuals looking to borrow money with individuals looking to loan the money for an attractive return.
Despite being robust in other countries, peer-to-peer lending has proved to be a murky situation for Canadian investors. Unlike in some countries, peer-to-peer lending in Canada does not have a legal framework adapted to its specific characteristics. As loans are interpreted as “securities,” peer-to-peer lending is regulated by the Securities Act of each province or territory.
Last June, the Ontario Securities Commission put out a notice stating that providers in the peer-to-peer lending market may be subject to regulation and could even be required to register as investment dealers.
The OSC said the emerging companies appear to have different structures and they may be subject to regulation, depending on how loans are provided and whether the loan products constitute a “security” under Ontario legislation.
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