When one thinks of financial innovation U-Haul is probably not the first company that comes to mind. But this year they have done something that no other company has ever done.
In February U-Haul introduced the U-Haul Investors Club. This club is a way for small investors to lend money to U-Haul for them to use as financing for new trucks and equipment. It is the first ever secured peer to peer lending operation launched by any American corporation.
U-Haul owns a lot of equipment. They have around 16,000 locations with more than 200,000 pieces of equipment. This equipment has a limited life and needs to be replaced on a somewhat regular basis.
A Change Born From the Credit Crisis
Traditionally U-Haul has done what most other large public companies have done when it comes to financing. They have gone to the credit markets and done private securities placements or raised some other kind of capital. This had always worked well…until 2008.
We all know that credit markets seized up in late 2008 and many companies like U-Haul were left without their traditional sources if capital. That year they raised only 30% of the capital they needed.
Jim Shoen, vice president and one of the controlling partners in Amerco (the parent company of U-Haul) and son of the founder of the company, was not impressed. He started to look for alternative methods of financing.
He was already an investor in Lending Club and the p2p lending model intrigued him. He wondered if that concept could be applied to the kind of corporate financing that U-Haul needed. He contacted some east coast law firms and they basically talked him out of it. They said he should just stick with traditional financing.
So, Shoen brought the challenge to U-Haul’s own general counsel and in-house legal team. They realized it was indeed possible; they created and submitted all the necessary legal paperwork and in February of this year they launched operations.
In the roughly nine months since launch U-Haul has raised approximately $7 million in equipment financing from 450 investors. They have grown slowly, by word of mouth, and most investors have some connection with U-Haul either as an employee, dealer, vendor or customer.
Why Would U-Haul Do This?
The question I asked Jim Shoen is why? Why would he bother doing this when there is clearly not much demand from investors right now. He agreed that it made no sense for the company given today’s volumes.
But he is looking 10-20 years down the road. He sees p2p lending as growing tremendously in this time period and he wants his company to be well placed to take advantage of this trend. And he wants more control over his equipment financing. Access to capital is one of the biggest threats hanging over their business, so if they can get a portion of their financing in this new way that will help secure their future operations.
By creating a large base of retail investors Shoen hopes that one day a large percentage of their funding can come from small retail investors. Ironically, their recent traditional debt offerings have been oversubscribed but that has not deterred Shoen. He is in this for the long haul (pardon the pun).
Secured P2P Lending Available in All 50 States
Unlike Lending Club and Prosper, U-Haul allows investors from all 50 states (there are some specific net worth requirements for residents of Idaho and New Hampshire). They have completed all the necessary SEC paperwork and investors can open an account and start investing with as little as $100.
I just opened an account last week and made my first investment in two U-Haul trailers. These investments are called U-Notes and they range in interest from around 3% to 8% and loans terms from three years up to 20 years.
Six Big Differences With U-Haul Investors Club
Now some will argue that this is not real p2p lending. This is quite true, there are several difference between what U-Haul is doing and what Lending Club and Prosper are doing.
1. The borrower is a public company
With traditional p2p lending at Lending Club and Prosper you do not know the identity of the borrower. At U-Hail Investors Club you know exactly who it is (Amerco) and you have complete financial information on that borrower because they are a publicly traded company.
2. The loan is backed by collateral
Not only that, but you have an asset that underlies the loan. So, in the unlikely event that Amerco was to go bankrupt there is an agreement with US Bank where they would act as a trustee and sell the assets. And if investors did not recover all of their outstanding principal then US Bank would sue Amerco for the difference.
3. There are no fees to the investor
U-Haul operates this program at no cost to the investor. So, if you see a loan for 5% then that is the actual return for the investor.
4. Interest rates are lower
There is less risk with this kind of investment so, not surprisingly, the interest rates are lower.
5. There is no way to spread your risk
Because every loan on the platform is to the same borrower there is really no way to spread your risk. So if you want to invest $5,000 there is not much advantage in diversifying into multiple loans.
6. There is no trading platform
While this is not something that Shoen rules out, at the moment the volumes do not justify a trading platform. So, if you invest in a five-year loan you will not be able to liquidate that investment early.
My Take
Not surprisingly, I love this idea and I really hope this is the start of something big. Of course, it is not really true p2p lending (U-Haul calls it direct investing) but it does allow retail investors access to a new kind of secured investment. U-Haul has created an efficient platform that is relatively easy to use and one that is certainly scalable.
I will be curious to see if other companies start this new kind of capital raising. What do you think? Is this an idea that has potential? As always I am interested to hear what you think.
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Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.
