Want to get into the business of lending directly to people who are planning to install renewable energy products? Peer-to-peer lending platform RateSetter offers a green option that allows borrowers to access finance at competitive rates for purchasing energy efficient and renewable energy products, while offering investors a higher interest rate than a bank deposit.
RateSetter was launched in the UK in 2010 and opened operations in Australia three years ago. Last year, they opened the green option, backed by a $20 million financing investment from the Clean Energy Finance Corporation (CEFC). The loans finance green product purchases including solar panels, battery systems, energy efficient lighting and energy efficient heating and cooling systems. More than 1000 households and small businesses have financed purchases through RateSetter.
RateSetter is the first company to be licensed by ASIC to provide peer-to-peer lending to retail investors and self-managed superannuation funds. The platform allows investors who want to lend money with borrowers. RateSetter has five channels, including the green option, says RateSetter CEO Daniel Foggo.
“Our biz model is around delivering good value to our investors and our borrowers,” Daniel says. “If you think about the banking model at the moment, there is not a high return on bank deposits, and borrowing has high rates. Using RateSetter, both the investor and the borrower can get better rates.”
The green option was launched specifically because of the CEFC investment, but since last year, 200 retail investors and Gateway Bank, have also lent funds for renewable energy purchases, Daniel says.
“We have a platform and an ability to distribute loans that would allow them to support the adoption of clean energy finance for individuals, and we could do that in a way where they got an attractive, risk adjusted return, and the end borrowers would get a really good product,” Daniel says. “It’s a simple online application, we work w/ the installer, there are no repayment penalties, and they’re borrowing at comparison rates that are market leading.”
Overall, RateSetter has transacted $290 million in loans since its launch and is adding $20 million per month, Daniel says. The green option’s lending capcity is growing 30% month on month, he adds.
The green loan pool had to be specifically tailored not only to ensure that the CEFC’s investment was only being used to fund renewable energy or energy efficient projects, but also because the payback period of projects such as residential solar tends to be around seven years.
“We created a new green loan market that stretches from three to seven years in term,” Daniel says,. “That falls within the criteria of a renewable energy product. Lending in our five year market, return to investors is about 9%, and our green loan market, which can be matched to 7 years in term, the borrowers are homeowners, or 95% of them, which is a good credit risk to be exposed to. The return that people are prepared to lend at is around 6.5%, which si important b/c we want to make sure the borrowers are getting good rates … What’s interesting is that those investors could be earning a higher interest rate in our five-year year market, but proactively deciding to support the clean energy market.”
RateSetter says the default rate on the loans on their platform is less than one percent, and that they maintain a buffer fund of around $9.5 million that protects 5.6% of the loan book. The funds are intended to protect lenders in the event of late payments or defaults.
Daniel says that 90% of the interest that the borrowers pay goes through to the investor, with RateSetter’s margin being 10%. They also charge an upfront fee to the borrower which is the fee for underwriting funds, which ranges from $200-$300 depending on amount and duration of the loan.
RateSetter expects the entire peer to peer lending platform will continue to expand, and is paying attention to the green market.
“Green loan is one area that we are investing quite heavily in,” Daniel says. “In fact, this week, we’ve had two more people join our green team. The economics for batteries are likely to change substantially through the next 18-24 months. The financing market there is quite substantial. I also think we’re going to see a shift away from the interest free finance for renewable products that aren’t really interest free. Also, this is not a space that the banks want to be in – they’re small amounts to loan, you need to have a technical background to make sure of what you’re doing.”