Last week saw our first new entrant in the US peer to peer lending market for quite some time. Rebirth Financial is the name of this new company and they are targeting a niche within p2p lending: business loans. But first some background.
While co-founders Choncol Gupta and Xavier Cabo were MBA students at Tulane during the financial crisis they noticed how difficult it was for Louisiana businesses to get access to capital. Many companies were just getting back on their feet after Hurricane Katrina and they wanted to grow but suddenly found themselves with no access to capital. Rather than just dismissing this problem, they decided to do something about it. Thus, Rebirth Financial was born. Rebirth Financial focuses on providing funding for small businesses but rather than partner with a bank or other financial institution they decided to go a different route. They wanted to be the first peer to peer lender in this country focused purely on small business.
I spoke with CEO Chonchol Gupta earlier this week who is understandably very excited about their launch. “While Lending Club and Prosper both provide loans for businesses, these are really personal loans, and the investor has little or no information about the business,” said Gupta. “We want to provide individual investors with detailed information about these businesses so they can make informed decisions about whether to invest or not.”
Anyone Can Be an Investor
One of the advantages of doing business loans (these loans are only made to business entities) is that you can circumvent the onerous SEC regulations that hampered both Lending Club and Prosper while they were getting established. They can claim an exemption under SEC Regulation D, so there is no need for investors to be accredited investors. There is also no need for Rebirth Financial to register each loan with the SEC as Prosper and Lending Club do.
Right now Rebirth Financial is focused on loans to businesses in Louisiana. But they have only been live for a little over week and as the platform matures they quickly intend to open up for businesses throughout the country. The plan for investors is to conduct a reverse Dutch auction, similar to the old Prosper model, for setting interest rates but they haven’t decided whether it will remain that way. As of this writing there was one small business with a loan posted on their site that carried a 10% interest rate for lenders.
The business model for Rebirth Financial is simple. There are no hidden fees, not even any loan origination fees; in fact the only fee a borrower pays is a $100 listing fee that is really meant to cover the costs of approving the listing for Rebirth Financial. They have decided that they will make money on the interest rate spread which they expect will be around 3%. One interesting twist they have is that they allow investors to use a credit card when investing in these loans, an unusual but convenient option.
The concept of adapting peer to peer lending for business is an interesting one. Both Lending Club and Prosper are promoting themselves as an alternative for small business financing, but the loan is still made to the small business owner. For small businesses, starved of capital from banks, p2p business lending is a great idea and one with huge potential. Raising capital has always been one of the biggest challenges for small business, and if p2p lending makes this process easier then I can see it catching on very quickly.
Whether or not this is a great investment for p2p lenders remains to be seen. This really will be the key to their success I believe. Finding small businesses who want loans should be fairly easy, making sure these loans provide good returns for investors will likely be more challenging. Peer to peer investors have other alternatives with Lending Club and Prosper so Rebirth Financial will be competing for investors from these institutions. Having said that, as the market expands and more investors become interested in p2p lending there will likely be plenty of room for niche players like this.
One of their challenges may be perception from serious p2p investors. If you look at business loans as a whole on Lending Club and Prosper they have tended to underperform other loan types. Rebirth Financial is counting on the fact that lenders will be more comfortable with business loans because there will be more information about the businesses. Whether this extra knowledge leads to a better return for investors remains to be seen. Conceptually, there is no reason why this idea couldn’t succeed. I, for one, will be following this new entrant in the p2p lending space with great interest.