Your guide to peer to peer lending

New Peer to Peer Lender Launches: Rebirth Financial

by Peter Renton on February 4, 2011

peer to peer business loans from Rebirth Financial

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.

My Take

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.

{ 9 comments… read them below or add one }

Dan B February 4, 2011 at 7:27 pm

Warren Buffet through BRK lent money to GE through some complex “warrants” deal in early 2009 I believe. The bottom line was that even if he was unable to execute the warrants the deal would still net him a return of 10% per annum. Once again we’re talking GE.

Now these guys want me to lend money to a small business at what interest rate again?? Are these small businesses incorporated? I’d be interested at 40-50% per annum. Or are these businesses sole proprietorships? If they are then in reality these are just personal loans, right?

Peter Renton February 4, 2011 at 10:23 pm

Dan, It is not exactly a fair comparison to look at an investment made in GE in early 2009. GE had lost something like 80% of its value in 12 months and many were wondering if it would survive. Today 3 or 5 year bonds for AA+ rated companies like GE are in the 2-3% range.

The one listing on Rebirth Financial with the 10% yield (for a 2 year loan by the way) has been in business for 20 years and has over 100 employees. I would guess this would be the business equivalent of a B1 rated loan on Lending Club offering a similar 10% yield for three years, and maybe that is conservative.

Sure, I wouldn’t want to lend to a startup business at 10%. But an established company with a profitable track record for many years I think will be a better credit risk than all but the most creditworthy individuals. Keep in mind, the name and all the details of the company is known to the lender, again something you don’t get with lending to an individual.

Jack February 5, 2011 at 2:22 am

I really like the concept of adding collateral to peer lending models like these guys and are doing. I agree that there is risk that a business can fail, but some collateral is better than an unsecured loan. The simplest is probably the Money 360 model which ties the loan to people’s homes. I hope these new models are successful as I think they change the game.

Dan B February 5, 2011 at 4:34 am

Hold on a sec. Are these secured or unsecured loans? And secured by what exactly? I believe you have to be a member to view this info. so perhaps Peter or someone who is can fill us in. Secondly, how many tens of MILLIONS of dollars is this company that’s been around for 20 yrs & has 100+ employees looking for?

Peter Renton February 5, 2011 at 10:46 am

These are unsecured loans and yes you have to be a member to view the details about these loans. The company in question is looking for a $20,000 loan to install two-way radios in their fleet of school buses.

Dan B February 5, 2011 at 1:47 pm

So a company that has been around for 20 years for God’s sake & has over 100 employees no less is doing so well & has such a bright & secure future that it’s looking for a measly $20k loan at 10% in this near zero percent environment. Where is this company located, Liberia, Ethiopia maybe? What is wrong with this picture??

How many successful 20 yr old companies…………….. even one tenth their size can’t just write a check out of petty cash for 20k? Hell, how many successful sole proprietorships can’t write a check for 20k? Or perhaps the individuals who run this company are friends, relatives or associates of the people who run this new website……………..& doing them a favor to help them launch their site? I’m just speculating of course as to motives here, but am I the only one that thinks this more than a bit unusual? And more importantly, how many serious businesses are going to look at that listing & think that it’s a bad joke & by extension that the site is one is well. Hell I would.

Peter Renton February 5, 2011 at 3:46 pm

Jeez Dan, you don’t believe in cutting a new company any slack do you? I have no idea of the relationship between Rebirth Financial and their first borrower, but I imagine given it is the first loan on the site that there is some connection.

Look, the company is in beta mode, they are trying to work out the kinks in the site and see what they need to improve. I am not all that interested in arguing the merits of this one particular loan, everyone has to start somewhere. I am more interested in the concept.

Rebirth Financial has basically the same business model as Funding Circle in the UK, and they are doing quite well in a competitive market having lent £1.3 million since they launched in August last year. This tells me the concept has potential and I intend to follow the only p2p lender in the US who is in the business niche.

Dan B February 5, 2011 at 4:57 pm

No, I don’t believe in cutting new p2p companies any slack. There’s been much too much of that in the genre already. Perhaps if there was more scrutiny, criticism, questioning & due diligence……………& less slack given & less cheer leading……….the tens of thousands of investors on a site like Prosper wouldn’t have lost both their shirts & their pants during the first few years of that p2p operation.

Appearances are important. First impressions are important. I started & ran my own business for 17 years, so I’m not just some guy talking out of his butt. If you want to be taken seriously, you ought not do the things that would cause serious people & serious businesses to look at you as an amateur & a lightweight. I don’t care if you’re in beta testing or not, a 20k loan request from a 20 year old company 100 person company on a site that’s purporting to support businesses is embarrassing to pretty much everyone that’s involved. You don’t put that up alone on your site. What’s the second loan going to be? 5k for the expansion of a chain of lemonade stands?

There was a nonsense looking report a few weeks back about how college students don’t really learn anything nowadays. I’m starting to think that maybe it wasn’t all nonsense & that maybe it applied to MBA programs as well.

Peter Renton February 7, 2011 at 11:30 am

Ok Dan, you have made it very clear where you stand. That’s fine, but I am prepared to have an open mind and see how this business develops.

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