When I wrote my book on P2P Lending for the retail investor, P2P Investing 101 (the paperback version here), that came out in November, there were only 7 options for retail investors. Those options were Lending Club and Prosper, as well as 5 options that take advantage of the adjustment to SEC Regulation A known as Reg A+.
For more background on Reg A+ and why it's so important, you can check out these older posts:
We now have an 8th investment option. The Worthy Bond, which uses Reg A+ and comes from Worthy Financial. By using Reg A+, the Worthy Bond is available to retail investors as a proxy savings account within the p2p lending landscape.
How It Works
The Worthy Bond is a 36-month term investment that pays you 5% annually. They have an excellent (albeit small) Support page for questions and answers. When I talked to CEO Sally Outlaw and Head of Business Development Paula DeLaurentis, they were very excited to tell me about this new program that only got SEC approval last month.
Here are some other cool features of the Worthy Bond:
- Minimum $10 investment
- Liquidity: While it's a 3-year term, you have liquidity and can cash out anytime with no prepayment penalty. It's not like paying fees to break a CD or paying whatever the market will bear to sell a corporate or government bond on the secondary market.
- It's the only savings account style option that uses the 'Proxy Savings' technique I discuss in Chapter 8 of my book. AHP pays a fixed rate but they are clear that you are lending AHP the money to buy more mortgages and you may not earn the 12% they offer if they lose money (which hasn't happened yet). The Worthy Bond is a savings vehicle only
How Worthy Pays 5%
It stands to reason that Worthy has to make money and more than 5% to pay you 5% fixed. How are they doing it?
The marketplace lending aspect of the Bond is Worthy taking all the money and putting the funds into asset-based loans (ABL). ABL is a general term for small business loans and lines of credit in the factoring, accounts receivables, purchase order or inventory finance space. Worthy likes inventory the most of these options so your funds are financing business inventory for businesses, a specialized area of lending where losses are usually VERY low if you know how to underwrite it.
The result is Worthy is lending a business money for inventory so they can sell more product. The ideal scenario is they make money on their product, Worthy makes money and you make your 5% money.
Could you earn less than 5%?
You bet you can earn less than 5%. Worthy is not a bank and these funds aren't insured against losses. If Worthy makes less than 5%, then you are going to make less than 5%. By way of comparison, insured bank savings account here in Atlanta where I live are paying the following:
With rates of 1.41-1.60% on savings accounts, you are getting a full 350 basis points (3.5%) more with the Worthy bond in return for this risk.
Is the Worthy Bond worth this risk for 350 basis points more? My guess is if you are reading this you already think the answer to this is Yes. I think it's worth the risk as well if you are looking for a simple savings vehicle.
If you want to learn more you can check out the Worthy site to learn more.