Callable Loans on Goldfinch

Details on our new callable loan deal structure and why it is an attractive option for investors

By Aaron Collett, Senior Credit Manager at Warbler Labs

Goldfinch is launching a new deal structure: callable loans. The product gives investors the option to recall their investment before the final maturity date of a loan. For the first deal, call payment periods will be set for every three months and require 60 days advance notice for calls, but these parameters are customizable in the product’s smart contract.

So, what is a callable loan and why do we think it will be so valuable for Goldfinch investors?

What are Callable Loans?

A callable loan is a type of loan that gives lenders the right to demand principal payment at regular intervals before the final maturity date of a loan. This means that if the lender decides to call the loan, the borrower has to repay the call amount at the end of the call period or face default.

Who is a suitable borrower for this product?

Callable loans are not suitable for every borrower or lender. Borrowers must have assets that have a shorter repayment period than the call frequency. For example, if a borrower offers only 30 day loans to their end-borrowers, then, if there is a call request, the borrower can collect on their end-loans and pay back the call requests within the 60 day notification window.

By contrast, if a borrower uses the money to finance a project that will take five years to start generating revenue (e.g. building a wind farm), then the borrower would have no way of getting cash back within 60 days to meet the call request. This is called an asset-liability mismatch and is a red flag for credit investors.

Why does the product appeal to lenders?

Because crypto investors want liquidity.

In the past few months, the Warbler Labs team has interviewed over 100 existing and potential Goldfinch investors. One message was very clear: crypto investors highly value liquidity. Most defi investors want the option for immediate liquidity on investments, but many would be willing to allocate capital if they can exit a position in 3–6 months. Deals on Goldfinch to date have 1–4 year maturities, so liquidity-sensitive investors aren’t willing to invest.

As a real-world asset (RWA) lender, Goldfinch cannot guarantee immediate liquidity because our borrowers need time to put capital to work and generate the returns needed to repay their Goldfinch loan. Most Goldfinch borrowers use the money to lend to their customers, so funds are tied up until their end-borrowers repay.

Callable loans are a middle ground between instant liquidity and 1–4 year investment lock-up. Crypto investors get a more suitable liquidity timeframe, while still giving borrowers the time to generate yield from their business activities.

How will Goldfinch implement the new structure?

Anytime we offer a new product, we have to be sure that its design is seamless and protects investor interests. Developing this project has required effort on several fronts:

• Smart Contracts: Making changes to the code to dictate all the steps between a lender submitting a request to the request being paid by the borrower
• Front-end: Setting up new interfaces and functionality for both lenders and borrowers to easily submit and monitor call requests
• Off-chain legal: We have worked with an internationally renowned law firm to draft the off-chain legal agreements that enshrine the rights of call requests

How Can I Invest?

As of March 28th, 2023, the first new callable pool on Goldfinch is now open for evaluation and investment. Backers invest in these pools through the Goldfinch dapp.

The deal page includes several features to support investors’ evaluation:

• The Basics: Borrower information and deal highlights
• Independent Credit Memo: The Goldfinch community has hired an independent analyst to diligence the deal
• Data Room: Detailed business and transaction details provided by the Borrower
• Legal Agreement: The off-chain facility agreement, drafted with an international law firm, is available to show investors how their rights are being captured in the real world

1st Callable Loan Deal with Fazz: SME Loans in Southeast Asia
Proceeds from this pool will be used by Fazz to provide short-duration loans to businesses in Indonesia and Singapore. Fazz is a Southeast Asian payment and SME lending provider whose book mainly consists of loans with tenors less than 90 days, and as a Series C Fintech is backed by Y Combinator (S17), Tiger Global, and prominent Angel investors.
Open until April 17, 2023 or until filled.