Edward Kholodenko, CEO of Questrade
After years of constantly re-investing profits to grow its business, discount brokerage Questrade finally decided to seek outside financing in 2013.
The company was able to raise the $10-million it needed, but the fresh funds came at a high price: The loan charged a 10-per-cent annual interest rate.
A year and a half later, Questrade is no longer in such a tough bind. Earlier this week Crown Capital Partners, the company that lent it the money, announced the five-year loan was repaid in full.
To outsiders, the situation looks promising. When loans are paid back early, it typically means the borrowers are doing better than they expected. That's true for Questrade, chief executive officer Edward Kholodenko said in an interview, though he added the repayment isn't as rosy as it may seem because the high-interest loan was mostly refinanced. In other words, the company still owes money, but the terms are likely to be more favourable, allowing Questrade to invest more in its own growth.
Exact details of the refinancing weren't provided. Questrade is private, which means it doesn't have to disclose financial information. The terms of its loan with Crown were only disclosed because the lender launched an initial public offering (IPO) this spring, requiring it to open up its books.
For Crown, the repayment isn't so positive. As a public company, it now needs to generate good cash flows and prove that it can grow. The repayment means it's already lost a client in its first few weeks on the market – "which they're not so happy about," Mr. Kholodenko said jokingly.
Announcing the repayment, Crown said in a statement that it is "delighted to have had the opportunity to participate in Questrade's success," adding that "Questrade is an outstanding company led by an exceptional management team."
Questrade sought the original loan to "grow its regulatory capital base in order to meet its growth targets," Crown disclosed in its IPO prospectus. Although Questrade could have sought out venture capital financing, it "was sensitive to ownership dilution," and therefore went with Crown, which lends to companies that are unwilling or unable to obtain financing through traditional sources, such as banks.
The funds were largely used to finance the launch of a wealth-management platform and Questrade's own exchange-traded funds. Historically Questrade was an online platform that allowed retail investors to trade securities, but it is starting to diversify. In November, the company launched Portfolio IQ, which gives retail investors access to customized investment portfolios online at a low cost.
Questrade also recently launched six of its own exchange-traded funds, and has plans to create four more. On Tuesday the company filed the paperwork to create the newer funds – three of which will be sub-advised by Jarislowsky Fraser.
The discount brokerage world was shaken up in 2014 after the big Canadian banks cut the fees they charge retail clients to trade online. Many brokerages are now struggling to find ways to make these businesses profitable.
Although Questrade's diversification strategy comes on the heels of these fee changes, Mr. Kholodenko said his diversification plans were drafted before the banks made their shocking fee cuts.
Tim Kiladze