SoLo Funds is an alternative to payday loans with bigger plans

Travis Holoway, CEO and co-founder of SoLo Funds, says his startup isn’t just a quick way to get a small, short-term loan. It’s the start of something bigger.

The startup, which raised $10 million in a Series A funding round last week, offers an app where users can lend money to each other. Borrowers typically give their lenders a small “tip” when they repay the money, and in turn build a “SoLo score” that helps them take out bigger loans in the future.

While Holoway says SoLo’s immediate goal is to provide quick access to emergency capital, he adds that the startup’s real goal is to create a virtuous cycle, in which borrowers move up the financial ladder and become lenders on the platform. Along the way, he hopes to introduce these users to new banking and investing opportunities that they might otherwise have missed.

“If we can get people here, take out loans when they need them, repay them on time, have access to more traditional financial tools and resources, and ultimately come back as a lender and pay on time, that’s is the best user lifecycle on our platform,” he says.

But while the startup can deliver on its promises of upward financial mobility, the reality is nuanced. Apps like SoLo Funds aren’t as predatory as high-priced payday loans, but they do have some of the same financial pitfalls. And with SoLo in particular, its use of social data to gauge user trustworthiness raises concerns about bias.

[Photo: courtesy of SoLo Funds]

How SoLo Funds works

Compared to other low cost loan apps such as To win and David, SoLo Funds is unique in that it is not tied to employee paydays and does not lend money itself. Instead, it outsources the work, allowing users to apply for loans in an open market. In return for taking the risk, lenders can earn tips of up to 12% of the original loan value, with the exact amount set in advance by the borrowers.

Loans can be as small as $50 and can go as high as $500, but SoLo doesn’t let new borrowers ask for what they want. To increase what they can borrow, users must develop a history of successfully repaying loans on time. It also contributes to a borrower’s SoLo score, which lenders use to assess the risk of any loan.

In a way, the SoLo market reflects the dynamics of real credit ratings. Users with no history on the platform tend to pay higher tips by around 8% on average, but as their reputation improves they are able to attract lenders while offering less. Holoway says long-time borrowers tend to tip around 3% to 5%.

“It’s because they actually have more history on our platform over time, which makes lenders view these people as more secure opportunities,” he says.

As for borrowers who fail to repay their loans on time, SoLo charges the borrower a one-time late fee of 15% plus a $5 administration fee. Beyond that, however, the amount borrowers owe does not accumulate or increase over time.

This is a major distinction from traditional payday lenders, whose business models revolve around trapping borrowers in a cycle of long-term debt. According to the Consumer Financial Protection Bureau, the average borrower delays (or “rolls over”) a loan three to four times, and about a quarter of borrowers roll over their loans more than nine times. Each rollover allows lenders to collect more interest, and payday lenders collect about 75% of their fees from borrowers who have rolled over their loans more than 10 times per year.

SoLo, by comparison, will refer delinquent borrowers to collection agency and credit bureaus, but the other main penalty is no longer being able to use the platform. Holoway says its default rate is three times the payday loan industry average. (Lenders may potentially cover the risk by paying insurance as a fraction of their tip, although they also pay a fee if their loan is recouped through collections.)

“Borrowers are inclined to repay these loans because if they need access to this type of capital in the future, they will not have access to it if they are in default and do not repay this initial loan” , he said.

Unmet needs

Holoway says the idea for SoLo Funds came from a personal experience. He and co-founder Rodney Williams became best friends in the early years when they both lived in Cincinnati. Holoway then moved to New York and became a financial adviser, while Williams became chief brand officer at Procter & Gamble, then co-founded ultrasound authentication service Lisnr.

We didn’t want to send someone we know, love, or care about to take out one of these predatory loans.

Succeeding financially at a young age was a burden for both founders, Holoway says they were often in the position of having to loan money to friends and family members. When they looked for other ways to get small, short-term loans, they only found payday lenders.

“We didn’t want to send someone we knew, loved, or cared about to take out one of these predatory loans, so at that point we realized there was an opportunity,” says Holoway.

He and Williams are both black, and while Holoway doesn’t like to dwell on the challenges they faced as black founders, he says they had to be more resourceful in fundraising. Data from Crunchbase shows that prior to SoLo’s Series A, the startup raised funds through convertible notes – a form of debt that converts to equity – in addition to a seed round and participation in Techstars, an accelerator based in Kansas City, Missouri.

Although some venture capitalists have questioned SoLo Funds’ ability to succeed in a downturn, Holoway points out that revenue is up 40% month-over-month since the pandemic began and that the platform currently has 100,000 monthly active users.

“At the end of the day, the pattern matching that VCs do when they’re looking for their next billion dollar release, there aren’t a number of people who look like me who have achieved that,” he says. . “When you put numbers on the board, people start to wake up.”

Hidden costs

This is not to say that the SoLo Funds model is without potential downsides. Because the startup takes no interest on loans, it has to rely on other ways to make money, some of which may seem sneaky.

[Photo: courtesy of SoLo Funds]

When applying for a loan, for example, SoLo asks borrowers to choose a “donation” at the app in addition to their tip to the lender, starting at 7% or $3.50 for new borrowers seeking loans. of $50. Technically, the donation is optional, but the only way to avoid it is to toggle into SoLo’s settings menu, which has to be re-enabled with every request. There is no way to decline donations while making the request itself.

Industry watchdogs have also raised concerns about the failover model. Although SoLo tips are also voluntary, and about 7% of loans funded on the platform involve no tipping, the app notes that loans are much more likely to be funded when users donate the maximum amount. Between tips and donations, users may end up paying a rate not much more favorable than personal loans, even if the late payment model is less predatory.

“In general, the tipping model just circumvents the rules around loan fee disclosure, and people end up paying a lot of money, and it’s not clear how voluntary tipping is,” says Lauren Saunders, associate director of National Consumer Law. Center.

The way SoLo Funds incorporates social media data into user reputation scores is also getting into murky territory. (Holoway didn’t tell me much about the specifics of how it works, saying they’re proprietary.) Saunders says that because social media can be tied to the race and community of a user, the use of this data raises concerns about the fairness of loans.

“Most lenders avoid using social media for fear of violating fair lending rules,” she says.

Holoway notes that SoLo Funds is not bound by these rules as it is not itself a lender and does not share any of its data with lenders on the platform. But somehow users still see the effects of this data through the scores displayed for each borrower. And without reading SoLo’s terms of service, users may not even realize that the data is being used for their scores in the first place.

“It’s not an area that’s well understood in terms of the actual fundamentals that determine whether someone has financial means or not, and there are all kinds of concerns about how using these things like proxy incorporates all sorts of other issues,” says Graham Steele, senior fellow at the American Economic Liberties Project.

Whether these concerns invalidate what SoLo Funds is trying to accomplish is harder to say. Steele argues that short-term loans are at best a narrow solution for a small group of people, namely those who run into some sort of specific short-term pinch but can usually afford what they need.

“For someone who is constantly behind on their rent, who is unemployed and who has no potential source of income, a loan will only be an anchor that will pull them down, rather than a ladder he can climb,” Steele said.

But Holoway’s own personal experience says otherwise. Growing up in Cleveland during an economic downturn, he saw how often people can find themselves in temporary traffic jams. If SoLo can become the default place people turn to get out of these situations, it opens the door to any long-term plans the company has, such as introducing users to banking and debit cards. credit, and better investment opportunities.

“Our goal,” he says, “is not for borrowers to remain borrowers on this platform forever.”

Norma P. Rex