Worthy Bonds are a fintech startup that offers you 5% interest by “supporting your fellow humans”. You can invest a little bit at a time, even doing “round-ups” of your purchases. However, whenever you see an interest rate well above FDIC-insured accounts, you have to dig deeper! The basic business model is that Worthy will pay you 5% interest and then take that money to loan out to small business owners (inventory-backed loans) at much higher interest rates, with Worthy keeping any difference as their profit. Here’s why I don’t like that structure.

You are buying bonds issued by a single start-up. Worthy Bonds are really just 36-month bonds issued by Worthy Peer Capital, Inc. In other words, it’s a bond backed by a single corporation, in this case a very young startup that has never been profitable. The bonds are not rated and not traded publicly. Worthy is not a bank. Your funds are not FDIC-insured. They do promise to invest your money into “fellow humans”, which in reality are small business loans secured by the value of their inventory. Which brings me to…

Inventory-backed loans are NOT low-risk loans. Worthy makes a big deal about how they make “asset-backed loans” which are amongst the safest loans out there. Yes, these loans are less risky than unsecured loans like credit card debt, but if you perform some basic research about inventory financing, you’ll see that there are still many risks involved. From Investopedia:

Lenders may view inventory financing as a type of unsecured loan because if the business can’t sell its inventory, the bank may not be able to either. This reality may partially explain why, in the aftermath of the credit crisis of 2008, many businesses found it more difficult to obtain inventory financing.

The easiest way to confirm this is to ask the market. A bond backed by Microsoft might yield about 3.5% interest. Now pretend that you are a small business looking for an inventory loans. Online lenders quote rates varying from 10% APR to 100% APR. Now, which is really “low risk”? From Fundbox:

Yes, applying for an inventory loan is an easy and fast process; however, approval isn’t. Because the merchandise purchased will be considered as collateral, lenders will have to assess just how risky your business is. If they determine that you will have a challenging time selling your products, then that means they will have an equally hard time unloading the inventory in the event you can’t repay your loan, and they end up with it. […] Inventory financing typically comes with higher interest rates. Lenders feel they need extra security as there is no personal guarantee or collateral involved other than the inventory.

The loans they have taken out so far have 7.44% to 18% annual interest rates, plus collateral management fees of 6% to 12% annually. This is taken directly from their SEC filings:

As of December 31, 2018 we had entered in to three loan receivable agreements for an aggregate amount of $1,200,000, with small business borrowers. The loans pay interest at varying rates ranging from 0.62% per month to 1.5% per month and collateral management fees ranging from of 0.5% to 1% per month.

Limited upside, unlimited downside. I’m not saying inventory loans are a bad deal, if you are compensated properly for the risk. If Worthy was more of an “access” play, where they took a small cut (maybe 1%) of these risky business loans and gave you the rest, I would be more interested. However, this is more of a “we do fancy stuff in the background, and give you 5% and make you think that’s a good deal” play. Even if their loans work out and they get 10% or 20% or ???, you just get 5%. Meanwhile, if these loans go sour, and Worthy runs out of venture capital, then you may be stuck with uncapped losses. What happens when a company borrows money against their warehouse holding $10 million “value” of fidget spinners, but suddenly they are no longer trendy?

They advertise that you can take your money out at any time, but they don’t advertise as heavily that this is all unless they default. Everything can look great, until one day it doesn’t. There is no FDIC insurance coming to the rescue. Worthy is doubly-exposed in the event of a recession. Inventory loans will default at higher rates, and their venture capital backing may also dry up. At this time, they also don’t have a bankruptcy remote vehicle where the inventory loans are directly connected to your investments.

Bottom line. Worthy Bonds are one of the many fintech startups out there asking for your money. If you look past the 5% interest and slick app, the underlying investment is small business inventory loans, which carry a meaningful risk of loss and usually charge north of 10% annual interest to the borrowers. However, Worthy Bonds limit your upside to 5% interest, while the downside is unlimited.

If you want to invest in corporate bonds for about 5% interest, I would recommend Vanguard High-Yield Corporate Fund Investor Shares (VWEHX). The SEC yield is right about 5%, and you get a diversified portfolio of 500 different bonds from rated businesses after they charge a low .23% expense ratio (less if you buy Admiral Shares). That 0.23% is the only gap between the market returns of the underlying bonds and what you receive.

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Worthy Bonds Review: 5% Interest, Backed By Small Business Inventory Loans from My Money Blog.

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