Topic: Prospa Background: Prospa is an Australian fintech company which specialises in lending money to small businesses. In some ways, it is similar to a “subprime” lender – it lends money to...

Prospa’s Business Model
Prospa is an online lender to small businesses based in Australia and recently, expanded its operations in New Zealand. It is “Australia’s #1 online lender to small business” (Prospa Prospectus, May 2019). Founded in 2012, it has served 26,900 customers and lent over $1.4 billion (Prospa Half Year Results, Feb 2020). The company has multiple product and service offerings. Its first and starting product is Small business loan. The loan size varies between $ 5,000 and $ 300,000 with terms between 3 to 24 months. The average loan size is $ 25000. The company launched its second product Line of Credit where the customer can borrow an amount ranging from $ 2000 to $25,000 with terms up to 12 months. Both the product doesn’t require any asset security (exception for more than $ 100,000 in case of small business loans) (Prospa Prospectus, May 2019). Prospa adopts risk-based pricing with costs determined by cash flow, the type and quality of business (Prospa raises $20m from Partners for Growth, Jul 2017). Prospa charges an average interest rate of 37 percent down from its earlier rate of 41 percent. Currently, Prospa is beta testing its new B2B payment solution Prospa Pay. The company attracts its customers through accessibility, speed, and experience. Small businesses don’t have security or documents which traditional banks require. The company serves such customers by simplifying the process and arrives at decision fast within the business day itself. It has a proprietary Credit Decision Engine (CDE) (Prospa Prospectus, May 2019). This engine digitally connects around 400 data sources and uses analytics to make a credit decision in an average of 13 seconds (Prospa raises $20m from Partners for Growth, Jul 2017).
Prospa follows a multi-channel distribution strategy. It has collaborated with AFG, Australia's largest mortgage broker, and Westpac. They refer their customer to Prospa. It struck deals with 4000 distribution partners including finance brokers and cloud accounting platforms (Prospa raises $20m from Partners for Growth, Jul 2017). Also, it acquires customers through a direct channel such as social media, TV, radio, print media, and sponsorship (Prospa Prospectus, May 2019). The company has received 4 funding rounds by VCs and PEs such as the Carlyle Group, Ironbridge Capital, AirTree Ventures, and few other institutional investors. Prospa has mainly 4 sources of funds to support its loans and operations: “Warehouse facilities, Term facilities, Corporate Debt, and Cash” (Prospa Prospectus, May 2019). Warehouse and Term facilities are both multi-tiered capital structure. Corporate Debt can be used for corporate purpose and Cash can be used for subscribing to notes in our Warehouse facilities or Term facilities (Prospa Prospectus, May 2019).
Prospa’s IPO postponed
Prospa was going to raise money at the market capitalization of $ 576 million when suddenly 15 minutes before trading commenced, it was postponed on 48 hours. The Australia Securities and Investment Commission (ASIC) had expressed its concerns regarding the fairness of its loan contracts. The corporate regulator said that “Prospa’s standard form contract may contain unfair clauses in breach of consumer laws” (Prospa float postponed by ASIC probe, Jun 2018). ASIC had published a report on 7 May 2018 on unfair contract terms and told fintech industry that they would be at “high risk if they don’t comply with the unfair contract terms (UCT) laws if they were using financial indicator covenants (which can trigger defaults based on loan-to-value ratio breaches), material adverse change in conditions clauses giving lenders broad default powers, or other "non-monetary default" clauses” (Prospa float postponed by ASIC probe, Jun 2018). The regulator also grilled banking royal commission for not being strict in enforcing UCT. So, Prospa decided to postpone IPO indefinitely as regulatory risk emerged and the stock would have fallen heavily (Prospa float postponed by ASIC probe, Jun 2018).
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