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Prevalent in the United States, Britain, Europe and Australia, peer lending increases borrowing capacity by providing a broad range of investors to fund loans, improving the availability of credit for high-quality but underserviced borrowers.Vectoraart/Getty Images/iStockphoto

Canada's first peer-to-peer lending platform is set to launch this fall allowing Canadian investors the opportunity to fund small local business ventures.

Peer-to-peer lending has been a controversial issue within the Canadian marketplace, with many providers opening their platforms only to institutional and accredited investors. (An accredited investor generally has to have minimum individual income of $250,000.)

But a new online lender – Lending Loop – will open its doors to allow Canadian investors with as little as $50 to participate in its online lending platform.

Lending Loop allows small businesses to apply online for business loans up to $500,000. Once approved, businesses are added to an online marketplace where individual investors can peruse the online shelves for investing opportunities.

Before handing over any cash, investors are able to see a company bio, the amount of the loan requested by the business, the reason for the loan and the amount of interest the business will be paying to acquire the loan. Putting all your eggs into one basket is frowned upon by the online provider and investors are encouraged to spread their investment across multiple businesses to diversify risk.

"The more businesses you lend to, the more you are spreading your risk and the greater chance you have of earning a positive return," says Cato Pastoll, chief executive officer of Lending Loop. "In terms of investor education, we prioritize in advising investors about the role of diversification on our platform."

The big incentive for investors will be the potential for robust returns – which will be 1.5 per cent less than the borrowing rate (which varies between 6 per cent to 15.5 per cent). There is no maximum amount an investor can loan, although individual investors are not permitted to fund an entire loan for one business to lessen the degree of risk involved. Investors will contribute along with other investors to make up the total amount a small business is requesting.

For investors forking over the cash it can be a risky investment product. The loans can take anywhere from six months to five years to repay. Investors receive monthly blended interest and principal payments. If a business ends up defaulting on the loan there is no guarantee on your principal amount.

For that reason, Lending Loop tries to determine the creditworthiness of the business before approving them as a borrower. Businesses must be operating for at least two years and currently have greater than $200,000 in annual revenue.

In the United States and the United Kingdom, peer-to-peer lending has been operating for almost a decade with online providers matching up individuals looking to borrow money with individuals looking to loan the money for an attractive return.

Despite being robust in other countries, peer-to-peer lending has proved to be a murky situation for Canadian investors. Unlike in some countries, peer-to-peer lending in Canada does not have a legal framework adapted to its specific characteristics. As loans are interpreted as "securities," peer-to-peer lending is regulated by the Securities Act of each province or territory.

Last June, the Ontario Securities Commission put out a notice stating that providers in the peer-to-peer lending market may be subject to regulation and could even be required to register as investment dealers.

The OSC said the emerging companies appear to have different structures and they may be subject to regulation, depending on how loans are provided and whether the loan products constitute a "security" under Ontario legislation.

In 2009, CommunityLend Inc., a peer-to-peer lending site for individual investors loaning to individual borrowers, was deemed by the OSC to be registered as an exempt-market dealer and could only allow accredited investors to provide loans deemed to be securities under the Securities Act. As a result, the company changed its business model and is no longer doing consumer lending.

Other peer lenders in Canada such as Grouplend and Borrowell have not yet shifted into investing opportunities for the average Canadian investor.

"We underwent an exhaustive review of the regulatory framework prior to launch and continue to keep an ongoing dialogue open with relevant regulators," says Kevin Sandhu, CEO of Grouplend. "In order to deliver the best value to our borrowers while keeping regulators happy, we will continue to work with accredited and institutional investors to fund loans."

Mr. Pastoll says Lending Loop's business model does not require him to register with the OSC, although going into details on how they are operating would be divulging proprietary information prior to their official launch at the end of September.

"We have spent a great amount of time ensuring we are compliant with all existing securities regulations. Regulators across Canada have continued to demonstrate a progressive attitude towards new financing models and we, as a marketplace, understand their importance in developing this burgeoning industry," Mr. Pastoll said. "As a platform, we are entirely in favour of regulation, but it is critical that regulations remain proportionate to these new business models, as exemplified in other developed economies such as the U.K."

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