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.
Innovation has to start somewhere. I think its great a company like U-Haul is doing this, great ideas come from some of the most unlikely places.
One question. Suppose Amerco were to go bankrupt and not all investors get their money back. How would US Bank be able to get any more money through bankrupt Amerco via lawsuit?
I like the concept, but it seems ripe for investors to lose money. UHaul controls the loan program, not the lender. Its a bit backward.
Interesting concept. I wonder if anyone in our circles is currently loaning UHaul money.
@Kyle, Agreed.
@Bilgefisher, Good question. I have pinged the U-Haul guys to see if they can respond. I am not sure where investors stand in the pecking order in the case of a bankruptcy.
@Matthew, I don’t know anyone. They have flown under the radar without doing any publicity. I had never heard of the program until they reach out to me a couple of weeks ago.
Very cool. With banks tightening lending standards and paying horrible returns, its good to see P2P investment programs like this. Everyone wins.
I’ve often thought that P2P lending can be a factor in getting the US out of it’s current economic quagmire (P2P mortgages anyone?)
Thanks Peter – I’ve been waiting for more secured loans (money360 etc.). I continue to think that the rates on Prosper are some of the best that investors can find even though they aren’t secured loans.
Currently the highest rate on U-Haul at 7% y/y for 12 years seems a bit low even if it is secured given that it is such a long time horizon and a diversified corporate bond fund (arguably less risk of default) yields 6.8% but has a duration of only 5 years. Longer time horizons like 12 years on a new platform introduces a bit of risk that I as an investor would like to be compensated for. (I believe that the platform from U Haul will still be here in 12 yrs but it is pretty new, which introduces an element of uncertainty). Still I’m excited to see what comes of secured loans in the future. Thanks again for the heads up. -T
@C. Jensen, I think p2p mortgages is the holy grail for the p2p lending industry. Money360 are doing a version of it for CA residents but an investor needs a lot of capital to invest. Once we get a few million active investors then we could start to see real estate funded by p2p lending with low minimums but I think we are many years (probably more than a decade) away from that.
@Thomas, The loan terms are long and it is a matter of opinion whether the rates compensate for that. With 10-year T-bills trading around 2% you are certainly getting a premium over that. U-Haul has been around since 1945 and has a pretty strong balance sheet so it will likely be around for several more decades. But at those rates there are many other comparable investments around.
Just read about it. Sounds awesome. Glad you pointed this out. Am signing up as we speak.
There is quite the market for notes on homes. You would be surprised how many buy and sell them. Heck one of my 1st real estate deals was a note (2nd mortgage) I bought for 50 cents on the dollar. The house then sold I made difference between full value and my discount.
Having multiple investors own part of the note is tricky, but not impossible. That note I bought was a deal with 3 other investors. We simply setup a LLC to hold the note. We were equal partners in the LLC. When the note sold, splitting the profit was very easy and legal.
Jason
@Phillip, Good for you. Let us all know what you think when you get everything set up.
@Bilgefisher, Interesting. But is there a platform anywhere that buys and sells these notes? If it was relatively easy I imagine someone would have done that already.
Peter, you are 100% correct. Its a pain, that why individuals that do buy and sell notes have done so well. Less competition, so better bargain prices. In nearly all cases, you have to have a relationship with a bank, other note investor or note holder to make it work.
The banks setup their own platform to buy and sell notes. It was called MERS. I could write a whole book on the problems that are coming to the surface with this program. The state attorney in Delaware has sued them. The Mass. Supreme court overturned a foreclosure done via a bank that used their system because the note transactions were not handled correctly. MERS issues have the potential to negate all foreclosures associated with them (ie millions of foreclosed homes). Its quite the hot topic in the housing industry.
Each and every county has there own fees and way to handle the sale of homes and notes. This program bypassed quite a bit of those. Now the law is catching up to it. I recommend just glancing at Wikipedia and you will see over a dozen cases in court right now. Even if your not in the housing industry, it is worth noting because it could have huge impacts on the US economy if these millions of foreclosures are ruled invalid and millions more waiting are further delayed.
Jason
This is interesting.
8-K SEC filing
http://biz.yahoo.com/e/110222/uhal8-k.html
This is not 100% new.
GE has had NON FDIC insured “CD” for as long as I can remember.
One of the advantages that GE Capital had was its ability PreLeman to tap retail investors at a very cheap rate.
The concept is interesting, will people invest on notes for 12 years with a 6% interest rate rather than corporate bonds?
It is a relevant question considering that the economy with this time period could dramatically change.
Funny observation on their websites:
https://www.uhaulinvestorsclub.com/HowItWorks
https://www.lendingclub.com/landing/partner.action?partnerID=60139&gclid=CM_qiP2mlqwCFUdn5QodxVVKQQ
🙂
@Bilgefisher, Wow, sounds like a nightmare. I can see why no one has really pursued this idea for p2p.
@Charlie, Correct me if I am wrong, but the GE capital offerings were not directly tied to an asset, right? Were/Are they secured in any way?
@Dan, That is the big question isn’t it. I think as time goes on they will probably have to adjust these rates. Right now, they are in the exploratory phase and are seeing what works and what doesn’t.
@Peter, thanks for sharing what U-Haul is doing. I had NO IDEA firms such as these were hosting p2p (or p2b) transactions within their own company and website. This leads me to ask, do you have a consolidated list somewhere on your website that shows all of the p2p and p2b websites that you are aware of?
@Chris, I had no idea either until they reached out to me. I do maintain a list but most of the companies on it are not active. They are either trying to get something going or are stagnant. But I am always on the lookout for new companies and will continue to share when I find out about them.
Thanks for this new information. While I am sure there will be a few hiccups along the way, I value the opportunity to lend to financially responsible businesses.
I wonder how many companies would have to start setting up these programs before the banks begin to get worried. I’d love to know what some of the big bank execs think about p2p…
@Ryan, I think the banks have many bigger problems on their plate right now than worrying about p2p lending. It is a minuscule fraction of total loan volume so I think it will be many years before we will see much concern from the banks.
Hi there,
What about p2p lending to pay off student loans? Is someone working on this? Would love to have a positive impact on those trying to reduce the cost of higher education. Also looking for better returns other than traditional savings accounts. Thank you for your time.
@Ken, I know of at least a couple of companies looking to crack into this market:
https://www.greennote.com/
http://www.people2capital.com
It is not exactly the same model as Prosper or Lending Club but they are trying to help student pay for their education in a novel way.
GE capital offerings were not directly tied to an asset, right? Were/Are they secured in any way?
Correct, they were just “secured” by the full faith and credit of GE. They typically paid about 50 basis points higher then a comparible CD.
Correct me if I am wrong but isn’t using LC, Prosper, personal loan, or a credit card to pay off a student loan not kosher? If you default on the new loan to pay off the student loan is still considered a student loan in BC court.
@Charlie, Yes I think it is actually against the terms of use at both Lending Club and Prosper to take out a loan for the express purpose of paying for college. Now, taking out a debt consolidation loan that pays off an old college loan and credit card balance may be different. Not sure. That is a good question.
Sounds intreating. Thanks for the great write-up. Love these new models coming through. We live in interesting times.
Simon Dixon