Peer-to-Peer (P2P) lenders are becoming a common FinTech model, as they offer lower interest rates to small and medium-sized enterprises (SMEs). They are also attractive to investors providing the loans, as investors receive a higher cut of the interest rate. Since many P2P loans FinTechs aim to scale and grow quickly, it is useful to know what legal issues you should be aware of at each growth stage. This article provides guidance on the four key stages of your P2P loans FinTech business.

1. Research and Development

In order to ensure the growth of your P2P loans FinTech, first engage in detailed market research. It will help you identify your target market and build a focused marketing strategy. 

This research will also help you decide how you will:

  • set up and operate your lending platform;
  • make money; and
  • differentiate your loans FinTech from competitors in a growing market.

There are plenty of resources available to conduct effective market research. For example, the Financial Analyst recently released the Peer-to-Peer Lending Market Research Forecast for 2017-2022, which provides a useful starting point for information and forecasts on the P2P lending industry generally.

Legal Needs

Being aware of the different legal requirements and issues at each stage of business growth will help you avoid problems down the track. The table below identifies key legal requirements at the Research and Development (R&D) stage.

 

Legal Need Purpose
Business Structuring Setting up your business structure correctly can help your company grow quickly. A good business structure can also help:

  • protect your company’s assets;
  • limit your personal liability; and
  • benefit you from a tax perspective.
Australian Financial Services Licence
(AFSL)

If you are providing lending services to SMEs, you may be required to obtain an AFSL or an Australian Credit Licence.

The Australian government has a regulatory sandbox for FinTech startups. For the first 12 months of your FinTech startup, you may not need to apply for a licence. This allows you to conduct detailed R&D without having to comply with AFSL regulations.

Confidentiality Agreement In your R&D stage, you will probably talk with developers, potential investors, and other key personnel about your business. Signing a confidentiality agreement with these parties can help protect your innovative ideas in these initial conversations, since you do not yet have formal intellectual property protection.

 

2. Pre-MVP and MVP

At this point in your growth, your developers should be hard at work developing your marketplace lending platform and your back-end software. Some P2P loans FinTechs also choose to:

  • provide a service aspect to businesses to help them plan financially; and
  • match businesses that need loans with loan providers.

Additionally, make sure you settle on your branding and commencing your marketing campaigns. Your business’ image will play a weighty part in attracting customers, so it is worth also setting up protections for your intellectual property (such as your business logo).

You might want to hold a soft launch with a few select investors and SMES from your target market. This helps tease out any issues with the platform and operating system before a full-scale launch. For example, you may use the soft launch to test your online application process when SMEs sign up for an account. This may help you answer questions like:

  • Is the application process too long for time-poor SME clients?
  • Do the underwriting and risk assessment mechanisms you use work for SMEs and investors?
  • Are short-term loans providing the right return to investors, with low enough interest rates to attract SME clients?

Ultimately, the soft launch will help you improve the quality of your product.

Legal Needs

The table below identifies key legal requirements of the Pre-MVP stage.

 

Legal Need Purpose
Trade marks A trade mark lets you build brand identity and loyalty. Registering a trade mark gives you the exclusive right to use your mark for a renewable period of time. It also protects your mark from being used by your competitors.
Development Agreement If you are engaging an external developer for your website and software, you should have a formal agreement in place with them. A development agreement should detail:

  • the scope of work;
  • the assignment of the IP to you on completion (otherwise the developer may own the IP); and
  • cancellation rights.
Employment Agreement

Use formal employment agreements when hiring staff. As an employer, you will also need to comply with the National Employment Standards and any relevant awards.

You may also want to consider whether to put an employee share scheme in place to incentivise employees.

3. Launch

At this stage your product is completed and you are ready to start lending to investors and businesses. Make sure that all your paperwork is in place at the time of launch – you will save yourself a lot of stress when your business starts to take on a large number of accounts applications.

Ideally, you should have documents drafted that can be used for both SME clients and investors. This not only makes the application process easier for your clients, it can also assist with keeping your records up to date. As a lending business, record-keeping is essential for compliance with the requirements of an Australian Credit Licence.

Legal Needs

The table below identifies key legal requirements of the launch stage.

 

Legal Need Purpose
WebsiteTerms of Use This document protects the intellectual property on your website. It also limits your liability in regards to the content on your website.
Website Privacy Policy This document ensures that your business complies with the Privacy Act. Having a privacy policy on your website is highly advisable if you are solely operating online. It is also particularly important for P2P FinTechs, as you will be storing large amounts of data with personal information.
Loan Agreement Your loan agreement should detail repayment terms and the consequences for non-repayment. This document should also reflect your Product Disclosure Statement.
Terms and Conditions A Terms and Conditions document contains standard financial services clauses and details payment terms. You should have this document if your platform does not provide any ongoing software, but is a sign-up and on-boarding tool.

 

4. Growth Stage

If your business operations have skyrocketed and are in a high growth phase, you may be considering raising capitalVenture capital funds and other professional investors can help provide equity investment to you, which you can use to scale and grow quickly compared to organic growth.

Legal Needs

The table below identifies the key legal issues of the growth stage.

 

Legal Need Purpose
Capital Raising When seeking investment to raise capital, you may need to:

  • finalise a pitch deck or information memorandum;
  • negotiate a shareholders agreement; or
  • draft or finalise a share subscription agreement, SAFE note or convertible note.

 

Key Takeaways

Getting on top of your business operations and requirements from the start will go a long way in setting up your loans FinTech for success.

For further advice on how to start up your business, or help with meeting legal requirements, contact LegalVision’s startup lawyers on 1300 544 755 or fill out the form on this page.

Sam Auty
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