Prospa to launch $146m float amid fresh focus on small businesses lending

Small business lender Prospa will land on the ASX today, in a litmus test for the local fintech sector.

25/05/16 Joint CEOs Beau Bertoli and Greg Moshal of Prospa. Fintech SME lender Prospa. Pic Renee Nowytarger / The Australian.

Small business lender Prospa is set to land on the ASX, with the company’s $146 million IPO a litmus test for how integral the local fintech scene is to the broader market.

Valued at $570m, Prospa’s success has spawned a host of similar online lenders — Moula, Get Capital, OnDeck — that are filling the gap left by the big banks. A happy ASX debut for Prospa would give them and the entire fintech sector a welcome boost.

However, investors will be keeping a close eye on what impact the latest instalment of the banking royal commission, which focused on small businesses lending, could have on Prospa’s prospects.

Launched in 2012, Prospa has lent over $500m to Australian small businesses and with current net loan book of $200m, the lender is looking to use the IPO to propel its lead in the market.

With 12,000 customers and a repeat business rate of 70 per cent, Prospa’s business model is predicated on the demand from those SMBs that need capital in a hurry. The fintech offers business loans of between $5,000 and $250,000 with no security required to access up to $100,000 and funding available within 24 hours.

The average loan size is $26,000 with an average term of around 11 months and SMBs don’t have to offer any security other than a personal guarantee.

However, the flexibility comes with caveats and Prospa lends at an average annual interest rate of around 40 per cent. While SMBs with no other options at their disposal are happy to sign up there’s still significant opacity around terms and conditions.

Disclosure practices and interest rates vary wildly across the sector and in Prospa’s case the lender uses the so-called “factor rate” — a number that when multiplied by the face value of the loan shows the amount of money the SMB needs to pay back by the end of the term.

For example, a factor rate of 1.24 applied on a loan of $26,000 would see the borrower pay back $32,240.

However, the approach has its critics who say that it makes the loan look cheaper than it really is.

Prospa’s average annual percentage interest rate (APR), a more traditional metric used in the industry, ranges between 40 per cent and 60 per cent.

It’s expensive money but for now SMBs are willing to pay the price and Prospa has over 7000 distribution partners and relationships with SMB-focused businesses like Reckon to drum up new business.

With banking royal commission highlighting the need for more transparency, a listed Prospa will be subject to more scrutiny as the local fintech sector works on code of conduct.

Meanwhile, the competition in the online lending market is heating up with more tech-savvy lending platforms targeting SMBS.

For now the fintech, which is part-funded by Square Peg, the investment fund founded by Paul Bassat and backed by billionaire mogul James Packer, will rely on its first mover advantage and the backing of its heavyweight private investors to convince the market that it’s ready to move up the food chain.

The IPO will see Greg Moshal and Beau Bertoli retain their 34 per cent stake in Prospa. In addition, Australian-based venture capital investors Airtree Ventures has invested an additional $3m giving it a stake in the company of 8.4 per cent. Meanwhile, SquarePeg has invested an additional $10m, increasing its holding from 3.2 per cent to 4.4 per cent.