Over the past couple of weeks, the popular online lender Prospa (PGL.AX) has seen its share price soar to its highest level since the start of the pandemic. While this is cause for optimism within the online lending industry, it begs the question of why this is so. The journey of Prospa during the pandemic has, in fact, brought more questions about the future of online lending.
There have always been critics of online lenders like Prospa, but now more than ever we need to ask about whether they actually benefit businesses. Prospa has been seeing low revenues and a struggling share price, and this cannot all be attributed to the pandemic. This signals that many businesses still see something unappealing in them.
Who is Prospa and what kind of services do they provide? Why are they indicative of wider economic trends?
Who is Prospa?
Propsa is the top Australian lender for unsecured loans. They provide loans to small businesses, even if they don’t have any assets to speak of. While some businesses turn to them as their first port of call for quick and convenient loans, for other businesses they provide a last resort.
Prospa’s service is undeniably worthy of praise. They approve many loans within an hour. Secured loans come with a small loan origination fee and a low interest rate. However, in providing unsecured business loans all too easily, they attract criticism just like any other private lender.
To be fair, Prospa does not provide loans to just anyone. They tend to reject businesses that have been operating for less than six months and don’t have consistent income. But when a business does meet their criteria, they are liable to give quick loans with interest rates as high as 26.5%. For their business line of credit, businesses might pay close to almost 30%.
These loans make Prospa a lot of money, even if they end up bankrupting a few businesses along the way. The high interest rates may raise very obvious red flags, but for businesses desperate for any source of capital, the red flags are easy to ignore.
But this is the reality across the world when it comes to private lenders. The industry is not regulated in the same way that public financiers are. Companies like Prospa make up an important part of Australia’s economy, and their global equivalents do the same. It is a highly profitable industry that has saved many businesses and has real virtues.
Over the past year or so, the Prospa share price has suffered. Why should this be so for an industry that seemed on track for undeniable success.
Prospa’s stock price
When Prospa (PGL) was publicly listed in 2019, it started with a bang. Share prices were high for the first few months and only seemed to be growing. However, in November of that year, the Prospa share price plummeted. It went from a high of almost $5 to an average of $2 over the following few months. Then COVID-19 hit.
The initial damage was caused in part by low revenues in the face of an industry that seemed set for success. Traditional lenders still dominated despite all of Prospa’s best efforts.
COVID-19 did damage to Prospa stock for a number of reasons. Many businesses were suddenly in no position to pay back loans, whether provided with high interest or low interest. Furthermore, there were few new applications for business loans, considering that with the future so unclear, businesses could not commit to paying them back.
The Australian Treasury, with the Coronavirus SME Guarantee Scheme, gave Prospa the privilege of facilitating government-guaranteed loans. While this brought many more loans through the company, these loans were provided with low interest rates and customer-centric payment terms. They were a way for the government to support small businesses rather than a capitalist venture.
Even as Australia returned to normal in fits and starts, the share price remained at a consistent low of around $0.80. But, over the past few weeks, the share price has soared to as high as $1.13. Considering that over a year had passed without any increases, this is significant.
Will this trend continue until Prospa reaches its early highs?
The problem with Prospa
The latest rise in share price signals cause for optimism for Prospa and any other Australian lenders who hope to see similar success. There is no reason to suggest at present that this trend should not continue. However, Prospa has its problems, which may be the cause for investor disillusionment.
The problem is that, in theory, there shouldn’t be any major problems. COVID-19 was an obvious catalyst for struggle in the industry. But the pandemic was not the beginning of the dip in Prospa stock price and until June, it had not recovered at all. Rather, it is Prospa’s own failings.
Prospa is in a great position as the top private Australian online lender. With their fast and easy service in providing unsecured business loans, there is no reason that businesses unable to get loans elsewhere won’t flock to them. And yet, traditional lenders still dominate the business lending space.
Traditional lenders should, by all accounts, be the last choice for many small businesses. Their processes are slow and paperwork heavy, and their approval times are no better. They have rigid requirements and few options for businesses that cannot meet them. Even businesses that are not struggling and are able to apply for secured business loans should, in theory, avoid banks and other traditional lenders.
The fact that Prospa’s revenues are low and that the share price has struggled so much is therefore cause for concern. It indicates that a lack of borrowers is not the problem. The economic impact of COVID-19 is not the barrier keeping Prospa from seeing consistent success.
Perhaps it is the very fact that Prospa offers unsecured business loans with such high interest rates that keeps businesses away. After all, throughout the world, lenders like these are often seen as predatory. And while you may turn to a predatory lender in times of need, they are not going to attract your attention when you have alternative options, even if they provide secured lending products that could benefit businesses far more efficiently than bank loans.
In other words, Prospa may need to lean further into its catalogue of secured products to balance out the optics of providing high risk loans. They need businesses to think of them as the reliable, convenient option, rather than as a last resort for desperate borrowers.
Prospa is expanding its offerings in 2021, expected to provide cash management services to SMEs in addition to other new products. Perhaps these products will improve how they are perceived, leading businesses to turn to them as a first port of call. Prospa has a 99% approval rate on TrustPilot, indicating that the clients who do end up using their products have a good experience and think highly of the company. It is getting the clients to use them in the first place that needs work.
The good news for Prospa is that their stock price is on the up. They can be cautiously optimistic, while aiming for greater uptake among businesses who have traditional alternatives.
For now, however, it remains to be seen whether Prospa can rise to the challenge and bring the private lending industry in Australia into its own. The traditional lenders are still waiting to be seriously challenged, despite providing services that have failed to evolve with the modern economy.
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