Name: Peter
Posts by peter:
- Overview of the P2P & Online Lending Industry
- The rapid growth of P2P & Online Lending
- Capitalizing on the industry’s expansion
- Interpreting Google’s recent investments into Lending Club & On Deck Capital.
How to Adjust to the New P2P Lending Reality
May 22nd, 2013
In the last six months the landscape for investors has changed significantly at both Lending Club and Prosper. It was just back in January when Lending Club had more than 2,000 loans available to investors and at Prosper this past November there were more than 1,000 loans. But that is no longer the case today – now both companies have typically between 50 and 200 loans available. What has happened?
A Flood of Investors Interested in P2P Lending
I think we will look back at 2013 and see this was the beginning of the mainstream acceptance of p2p lending as an investment. It certainly has caught the attention of large institutional investors. Not only that but I have been told that new retail investors are also flocking to p2p lending in record numbers.
This increased level of interest has led to a lot more competition among investors. Back in the old days (just over two years ago) at Lending Club and Prosper you could ask borrowers open-ended questions and ponder their responses for days on end as you consider whether to invest in a loan. Very few loans were fully invested in less than five days. Today, many loans are being fully funded within five minutes.
In this post I am going to share how I am adapting to this changing environment to ensure I can still put my money to work and earn a double-digit return.
New Lending Club Investment Strategies
At Lending Club the mix of loans on their platform is roughly the same as it always has been. B and C grade loans still dominate accounting for over half the loans issued so far this year. The only marked difference between this year and last year as far as loan mix goes is that there are fewer A-grade loans, which I imagine is driven by investor demand. But there is competition for all loans (with the exception of most A grade loans), so here are three things investors can do to adapt.
1. Remove Verified Income Loans from Your Filters
If you use verified income as one of your filters then you are really having a hard time, actually an impossible time, finding loans. Every loan at Lending Club is being fully funded within 48 hours these days. But it takes that long for borrower income to get verified. So, as Lending Club explained in this blog post last week they are still performing the same number of income verifications – over 60% of loans. It is just that investors don’t get to see which loans are verified any more because the loans are funded before the borrowers income is verified. Most of the time there are zero loans available that have verified income.
2. Invest Right After Loans are Added to the Platform
It is common knowledge to many investors now that Lending Club adds loans to their platform four times a day – at 6am, 10am, 2pm and 6pm Pacific time seven days a week. If you login promptly at those times and run your filters you will have plenty of loans to choose from.
3. Be Quick
This is the most important one today. If you never want to miss a loan you will have to give up on reading the descriptions and asking questions of the borrower. Popular loans can disappear within minutes, sometimes even seconds.
Now frankly, this is a pretty silly system that I expect will change soon. There is no need for Lending Club to put a strain on their servers four times a day – I think we will be moving to a more real time system some time later this year, probably after Lending Club implements their long awaited Auto Invest feature.
New Prosper Investment Strategies
While not as dramatic as Lending Club, Prosper has also had a recent surge in investor interest. And long time Prosper investors know that with large investors like Worth-Blanket2 competition for some loans has been strong for a while now. Prosper has also changed their mix of loans in recent months. Instead of being dominated by the C and D grade loans as was the case for most of 2012 now A and B grade loans are most prevalent on their platform.
1. Don’t Focus on Repeat Borrowers
If you have read my How I am Investing in 2013 post you will see that two of my four Prosper filters focus on repeat borrowers. Unfortunately, these filters now produce very few loans. In fact, my Automated Quick Invest (AQI) has only found three loans this month for my repeat borrower filters. There are plenty of repeat borrowers available at the A and B grade levels but the D, E and HR grades are few and far between now.
2. Expand Your Filters
This is something I was reluctant to do but my cash was building up in my Prosper account. So, rather than allowing my cash to just sit there I decided to add some new criteria. I now have an AQI setup for two additional filters. One is my Super Simple filter that I wrote about a few months back and the other is a broad income based filter (Grades C, D and E, Income >= $50K, Inquiries = 0, Term = 36 months). After several weeks of having my cash balance build up it is being reduced at the rate of $1,000 a week now.
3. Be Quick on the Lower Grade Loans
There are fewer low-grade loans (D, E and HR) on Prosper today than before. Those that do come onto the platform are snapped up in minutes. Prosper adds new loans at 9am and 5pm on weekdays and noon on weekends (all times Pacific). You should login at those times to have a chance at the lower grade loans. If you are focused on A and B grade then you will have plenty of selection at any time.
There is No Going Back
I know many people here complain about the dominance of institutional investors and how the small investor is getting squeezed out. While, it is certainly more difficult than before to put your money to work astute investors can still find plenty of good loans.
The large investors are here to stay. In fact, there is more interest from institutional investors in Lending Club and Prosper than ever before. We are not going back to loans staying on the platform for days on end. For some investors, that might mean they no longer want to invest. For me, I still find this a great place to put my money and I am adapting to this reality.
What about you? Have you changed your strategy at Lending Club or Prosper this year? As always I look forward to hearing from you.
Peer to Peer Lending News Roundup – May 18, 2013
May 18th, 2013During the week I share the latest p2p lending news on Twitter as it happens. Then every Saturday I take the most interesting news items and blog posts from the past week and share them here.
Disruptors Providing Next-Gen Financial Services from CNBC (video) – Lending Club named one of five financial services companies in the CNBC Disruptors 50 list.
Zopa CEO Giles Andrews: less talk about rebuilding trust in banks, more doing from Wired UK – Interview with Zopa CEO Giles Andrews on trust and the big banks.
Peer to Peer Lending: Loving Your Neighbor With Your IRA from Bible Money Matters – In this guest post Simon Cunningham from LendingMemo discusses the social impact of p2p lending.
Now You Can Send Money Through Gmail, Google Announces from Huffington Post – Google Wallet is being integrated with Gmail, yet another step on Google’s foray into financial services.
Lending Club’s Sanborn Discusses Recent Google Investment from LendingMemo – Another excellent interview by Simon Cunningham, this time with Lending Club’s COO Scott Sanborn.
Time to Bail on Bonds? from Bloomberg TV – When asked where investors should put money if they take it out of bonds commentator Bob Rice suggested p2p lending.
More Information About Our “Verified Income” Filter from Lending Club’s blog – The loans are disappearing so fast from Lending Club these days that virtually none of the active loans have income verified before they are fully invested.
From the Lend Academy Forum
The Lend Academy forum is where investors go to discuss p2p lending. Below are some topics that were being discussed this week.
Feeling Irritable! – This investor is irritated when loans pay off early, others provide their opinion on this issue.
Mobile – Lending Club quietly released a new mobile-friendly version of their website this week.
Desperate Borrowers – Investors weigh in on one particular loan and whether to hold or sell.
Funding Community Brings Local Business Lending Online
May 17th, 2013
The small business lending space just got more interesting. Funding Community launched last week with the promise of bringing together local businesses and investors.
Small Business Lending for (Almost) Everyone
Great, you may be thinking, another opportunity for accredited investors. No. The tagline for Funding Community is “where anyone can lend to a small business” and as its name implies it is taking a true community approach to small business lending. Funding Community is open to all investors (they call them lenders) in every state except ND, PA, SD, TN, WV and WI.
How is this possible? Alex Binkley, the CEO and co-founder, has found a way around the expensive S-1 registration requirement that has been a prerequisite for companies looking to compete directly for investors with Lending Club and Prosper.
Before you jump to conclusions and think that Alex Binkley is crazy let me share with you some background. First, Alex is an attorney who used to work for the prestigious law firm of Wilmer Hale. He has examined the securities law surrounding p2p lending in depth. He has also sought dozens of legal opinions on this matter and he is comfortable with his interpretation of the law.
While he won’t give away his secret sauce it does have something to do with an exception created by a Supreme Court ruling that allows for certain types of short-term business loans in small amounts. The maximum loan amount at Funding Community is $10,000 and they are all nine-month loans.
How It Works
Anyway, on to his business model. Funding Community is all about connecting local businesses with the investors who love them. Unlike most lending platforms, Funding Community encourages its borrowers to not just apply for a loan but to use the loan as a marketing vehicle. That is why you will see most of the loans on the site with some additional benefit for lenders.
For example, right now there is a fitness company looking for a $3,500 loan. If you lend money to this borrower you will also get two free personal training sessions. Quite compelling if you happen to live in New York and are looking for a trainer. Similarly, a custom clothing company is offering a 20% discount on shirts for lenders who provide money for their loan.
But this is not like Kickstarter where it is all about the gifts you receive. Lenders will also receive a return on their money. The rates are much lower than you might find at other sites because their hope is that lenders are looking for more than just a financial return. While anyone can lend, they expect most of the lenders will be connected in some way to the businesses obtaining the loan.
Secured Business Loans
Even though you won’t see any mention of investor returns on their site, Funding Community is very serious about providing a good experience for lenders. They have a security interest in the assets of the business and every loan has a personal guarantee from the founders. The expectation is that this will lead to very low default rates. But obviously there is still risk involved which Funding Community details on their site.
They are also very much focused on the small lenders. The maximum amount anyone can lend is $1,000 per loan, so this will rule out interest from almost all institutional investors. The minimum investment is just $25 per loan.
They are starting off in New York (for borrowers) and hope to expand to California later this year and then continue to other parts of the country. Their plan is to grow methodically one community at a time.
It will be interesting to see how Funding Community goes. They have a truly unique model, focused on community as much as finance. Their biggest challenge as I see it will be achieving scale. They do have the advantage of being a part of the largest local community in the country, being based in New York. So if they can make it there…they should be able to make it anywhere…
New Fund Invests in Small Business Loans
May 13th, 2013Those of us that have been following the p2p lending industry for a while will recognize the name IOU Central. Back in February 2008 they became the first p2p lending company to launch in Canada. In late 2008 they opened an office in Atlanta to service the US market.
But their foray into p2p lending didn’t last very long. After dealing with similar regulatory issues that plagued the start of Lending Club and Prosper, founder Phil Marleau decided to pivot into an opportunity that he thought would be more lucrative: small business loans.
Not only did IOU Central switch from consumer to business loans they also decided not to pursue the p2p lending model, preferring instead to pursue a direct lending model. In December 2009 they had issued their first business loan. To give you an idea of their growth and volume, in 2012 they issued $11.5 million in new loans and in just the first quarter of 2013 that number was $8.7 million.
These are not loans made to high-risk startups – these are all established businesses looking for credit. The most common type of business is a doctor or dentist office. The average age of the businesses obtaining a loan is around 12 years and the owners all have good personal credit. The average loan size is $39,000 and most borrowers choose a 12-month loan duration (there is also a 6-month option).
The Direct Lending Income Fund Launched in October 2012
Now, to the investing side of the equation. Brendan Ross of Ross Asset Advisors launched the Direct Lending Income Fund in October 2012. This fund purchases small business loans issued by IOU Central.
Many of you may remember Brendan Ross from my interview with him last year. He was the first registered investment advisor to invest in LC Advisors and he has also invested his clients’ money in funds that invest in Prosper. He has been very bullish on p2p lending from the beginning. So why has he started a fund dedicated to small business loans? When I asked him that very question he sent me a detailed reply.
I’ve been an investor in P2P since Lending Club first created institutional vehicles in March of 2011. I’ve since put personal and client money into almost every fund that has grown up in this space. I reached the point where I couldn’t responsibly own more P2P consumer loans, but I wanted more private debt.
I knew that web-based underwriters could succeed wherever banks were failing to meet demand, and I knew in my gut that loans to local, established businesses were what was next. Starting in March 2012, almost exactly a year after I put money into consumer loans, I began doing serious research into the existing web-based underwriters whose focus was local, established businesses.
Although the Fund has a mandate to be multi-platform, I chose to start with IOU Central because they are a public company, their management team is strong and supportive of what I am doing, and they have been loaning money since Q4 2009 with excellent results.
I started the Direct Lending Income Fund because I wanted to put personal and family money to work in the business loans asset class. I lined up friends to join me during the first six months, when the Fund would be less proven. Now the results speak for themselves, and I’m typically running a 30-60 day waiting list for new investors.
The results that Brendan is talking about here are annual returns in the low to mid teens. This is what caught my attention when I first started looking at his fund.
IOU Central is not a P2P Lender
There has to be a catch, right? Unfortunately, IOU Central is not available as an investment for the general public. At this time it is only available through Brendan’s Direct Lending Income Fund and the minimum investment is $100,000.
So why am I writing about this if it is not about p2p lending? Because I believe it is a great investment that offers a predictable, high yield. This year I am expanding my focus beyond true p2p lending to other areas of direct investment. Most of the readers here are investors looking for opportunities for yield in this prolonged low yield environment.
What are the Risks?
Like any investment there are risks. In fact there are 18 pages in the fund’s Private Placement Memorandum going into great detail about all the risks involved. For example, we could have another financial crisis that could send default rates up dramatically or IOU Central could go bankrupt which could cause loss of principal, just to name a couple of the risks.
IOU Central has gone to great lengths to ensure investor’s money is as safe as possible. They file a UCC against the assets of the business for every single loan they make. Also, they obtain personal guarantees from the owners of the business. So, in effect these are secured business loans.
I Have Invested $100,000 in This Fund
This fund is not for everyone. For starters, it is only open to accredited investors. And if you are not a qualified client (see definition here) then you pay slightly higher fees.
I researched the Direct Lending Income Fund extensively including a long sit down with Brendan Ross going through the IOU Central platform and looking at the loan history. I decided to make a $100,000 investment in this fund.
To Find Out More
If you are an accredited investor and want to find out more you can fill out the contact page on the Direct Lending Income Fund site and Brendan will get back with you.
I only share investment ideas with you that I believe in and that I have invested in myself. This post is not a paid endorsement; I am sharing it with you because I have made this investment and believe it is a good opportunity. But please read my disclosure below.
Disclosure: I am by no means suggesting that you should make an investment in this fund. I want to make it very clear that this article is not investment advice. You should always check with a financial professional before making any investment decisions.
Peer to Peer Lending News Roundup – May 11, 2013
May 11th, 2013During the week I share the latest p2p lending news on Twitter as it happens. Then every Saturday I take the most interesting news items and blog posts from the past week and share them here.
Google Glass And Lending Club Signal Changes At Google from Forbes – More about Google than Lending Club but an interesting read nonetheless.
This Week’s Podcast with Peter Renton from Lend Academy from Money Q&A – Hank Coleman interviews me as well as Scott Sanborn from Lending Club for his Your Money Your Choices podcast.
P2P Lending Surpassed $2B In Loan Origination from Investing.com – Discussion of the growth in p2p lending as well as the recent Google & Lending Club deal.
New safeguards add extra security for peer-to-peer lending schemes from Herald Scotland (UK) – Analysis of the new Zopa guarantee program for their lenders.
P2P Lending Sites: An Exhaustive Review from LendingMemo – An in depth look at the most popular US p2p lending sites.
Lending Club – April 2013 Update from Write Your Own Reality – Monthly update from this successful p2p lending investor.
A New Way to Get Small Business Loans From Neighbors from Businessweek – A look at Funding Community, a new small business lender based in New York. I will be covering this company on the blog next week.
Prosper Responds to Google’s Investment in Lending Club from LendingMemo – An excellent wide ranging interview with the new Prosper president Aaron Vermut.
Do small business loans generate significant returns? from Endurance Lending Network – Discussion of the returns and the default rates in small business lending.
Peer-To-Peer Lending Stake: How Google Sealed Its Market Lead from Seeking Alpha – A look at what the deal with Lending Club means for Google.
From the Lend Academy Forum
The Lend Academy forum is where investors go to discuss p2p lending. Below are some topics that were being discussed this week.
(Re)Leveling the playing field … – Very popular discussion about ideas for leveling the playing field between retail and institutional investors.
Regulatory Challenges for p2p – What future challenges might be coming for p2p lending?
Do you consider $35,000 a red flag? – Are the largest loans to be avoided asks this investor.
Peer to Peer Lending Piece on NPR
May 10th, 2013
Normally, I include all p2p lending news stories in my weekly Saturday roundup. Occasionally, though, I feature the major stories here as soon as they happen. This is the case today.
NPR’s Morning Edition has around 13 million listeners according to their website. This morning, they covered p2p lending for the first time since I have been following this space, prompted by last week’s news of Google’s investment in Lending Club.
This is probably the largest audience ever to hear about p2p lending and is yet another step towards the mainstream for Lending Club and Prosper. I was also very pleased to be included in this story. I have to admit it was quite surreal driving to the gym this morning and hearing myself on the radio. You can listen to the segment here.
Comparison of Different P2P Lending Investment Strategies
May 8th, 2013[Editor's note: This is a guest post by Bryce Mason, the founder of P2P-Picks (go here to read my review of his service). He has done some groundbreaking research here by analyzing various Lending Club investment strategies from different bloggers and calculating their real return based on historical loan data. While Bryce is obviously trying to promote his own service, I believe the analysis he has done here can benefit all investors.]
There are many opinions about P2P portfolio selection strategies, but not much analysis that allows transparent comparisons among them. At least a dozen bloggers have published strategies that aim to increase return on investment (ROI). There are also a number of pay services with proprietary strategies aimed at accredited investors (via investment funds) and regular account holders (via research subscription sites like InterestRadar and P2P-Picks). P2P investors must try to put different strategies on a level playing field and judge their value fairly, such as in the following graphic.
The purpose of this blog post is to provide a framework for individual investors to make more valid comparisons across strategies.
1 Strategies
Strategies for this post include those authored by various people around the web who have published filters—the criteria by which they select loans for investment. We followed their rules and developed lists of all LendingClub loans issued from 2008-Q3 to 2009-Q3 that each strategy would have selected, and then we simulated a $25 investment in each one. Due to the nature of proprietary strategies, we could only include our own, the P2P-Picks Profit Maximizer, and tested its three levels of recommendations: the predicted Top 1%, Top 5%, and Top 10% of all loans. So as not to use information that would have been unknowable at the time, we developed a special P2P-Picks model just for this purpose, based entirely on loans issued prior to 2008-Q3.
2 Outcomes to Consider
At least three outcomes must be considered for an investment strategy.
First is a measure of its ROI. A good measure of ROI should be based on actual performance over the entire course of the portfolio (or monthly performance of portfolios that have an average age well beyond the point at which defaults have peaked). This is important because some strategies advertise high performance on youthful portfolios, or paper over older defaults with an increasing portfolio size. Under those cases, it’s easy to hide future losses that will eventually come home to roost. Additional considerations include interpretability (such as using an annualized measure of performance) and specificity (measuring only the performance of the strategy and not confounding it with investor behavior—like allowing cash drag to eat away at returns under one strategy but not another).
For ROI we used Excel’s XIRR function, which takes a periodic set of cash flows (investments and repayments on various dates) and uses a numeric approximation method to generate an annualized return. Thankfully, we have payment dates and amounts for all LendingClub loans. This is an excellent measure of ROI for all of the reasons above. It is based on actual performance. It covers the entire investment period because loans issued at the tail end of our experiment have already matured and their outcomes are known (it was useful to wait a few additional months past maturity for late payments to trickle in). It is extremely interpretable. And it solely measures the strategy performance because only the dates of investment and repayment are considered (no cash drag is measured and no assumptions about reinvestment need be made). All ROI calculations are net of the 1% LendingClub servicing fee and, for the P2P-Picks models, the approximate 1% subscription fee.
Second is a measure of volume—or how much money can realistically be invested in a given period of time. Deploying $1,000 is easier than $1M, and different investors will have different needs. For this measure, we simply looked at the percentage of all LendingClub loans that each strategy recommended.
Third is a measure of the portfolio’s risk. Few investors consider risk explicitly, or assume that interest rates compensate for risk entirely. For the same reasons as in ROI, a good risk measure should look over the entire course of the portfolio and measure variability in the outcome. We chose to construct a simple risk metric based on each loan’s ultimate repayment amounts, and then aggregated them up to the portfolio level. More information about the definition of this metric can be found in the P2P-Picks white paper. Portfolios with more loan losses received a higher risk score.
3 Results
From the above figure, one can see that there is large variation in portfolio performance. In this case, we see that a few strategies appear to provide outsized ROI and less risk, and a few provide worse ROI and more risk than the LendingClub Index (an equal investment in every note). Once performance has been plotted in this way, preferred strategies become obvious. No strategy to the right and below the LendingClub Index would have been a worthwhile investment, as it offered lower returns, more risk, and less volume.
In terms of loan volume, the following chart demonstrates which strategies were able to offer investors a higher volume of loans, increasing the chances that in a real-world application there would be loans available for investment. Again, there is substantial variation in ROI for every level of loan availability. Any strategy below the LendingClub Index ROI line was strictly inferior.
4 Conclusion
Apples-to-apples comparisons of strategy performance can help investors make more informed decisions about how to deploy their funds. In addition to ROI, one should consider portfolio risk as well as volume produced by the strategy.
Further, a credit-model approach to selecting notes—such as P2P-Picks— appears on balance to be superior to filter-based approaches, which from the first figure can be seen to have lower returns and more risk. One reason for this is that filter-based strategies are necessarily too restrictive in terms of how they identify “good” loans. Many borrower attributes are quite fine grained and small movements in them only affect the likelihood of default a little bit. Having an absolute and arbitrary cutoff (e.g., zero inquiries) when many other borrower attributes look positive may reject an excellent investment opportunity.
The above post is a summary of Bryce’s research. You can access the complete report here.
[Update: Based on the feedback in the comments Bryce added two more quarters of data to the Risk vs Reward chart. The ROI picture has changed quite a bit - most likely because the sample size is now larger and one or two charged off loans have a less dramatic impact.]
Register for This Free P2P Lending Webinar on May 30th
May 7th, 2013
My partner and co-founder of the LendIt Conference is Dara Albright of NowStreet. She regularly conducts webinars as part of her Capitalizing on Financial Innovation series. I am pleased to announce as part of that series on May 30th I will be presenting at a free webinar about the recent explosive growth of p2p lending.
Here are the topics we will be covering:
So mark your calendar for May 30th at 1pm Eastern time. You can register for the free webinar here.
Peer to Peer Lending News Roundup – May 4, 2013
May 4th, 2013During the week I share the latest p2p lending news on Twitter as it happens. Then every Saturday I take the most interesting news items and blog posts from the past week and share them here.
As most of us know by now the big news this week was the Google and Lending Club deal. In fact Thursday was the biggest news day in the history of p2p lending with no less than 100 different articles being published about the deal. I am not going to list them all here but every major business publication covered the story: The Wall Street Journal, Fortune, Forbes, New York Times, Bloomberg and Entrepreneur just to name a few.
There were some other stories and blog posts this week worth noting.
One Big Risk Of Peer-To-Peer Lending: You Might Get Addicted! from Financial Samurai – This Prosper investor gets a lot of enjoyment from doling out his money to worthy borrowers.
Introducing: the Zopa Safeguard offer from Zopa’s blog - Zopa in the UK is introducing a fund to protect investors when a borrower defaults.
Stepping Away from Lending Club from Wall Street Oasis – Sometimes it is good to consider a negative opinion and this investor explains why is stopping his Lending Club investments.
Lending Club Strategy: 7 Tips for Solid Returns from LendingMemo – Some great tips for p2p investors to maximize their returns at Lending Club.
Prosper Reports Record Month in April from Prosper’s blog – Prosper’s president Aaron Vermut provides some background into the numbers and explains the new whole loan program.
The Lending Club – a critical review from CBS MoneyWatch – This CBS reporter questions the overstatement of the Lending Club return numbers.
Monthly Peer to Peer Lending Meetup – There is monthly meetup for p2p investors in New York City. I will be speaking at this month’s meeting so if you are in New York please join us.
Google Buys Minority Interest In Lending Club: Lending Club Returns At 11.18% from Bible Money Matters – Long time blogger and Lending Club investor is still doing well with an NAR over 11%.
Does Google Want to Be a Small Business Lender? from Businessweek – This reporter looks at the deals Google announced this week with Lending Club and On Deck and draws his own conclusions.
From the Lend Academy Forum
The Lend Academy forum is where investors go to discuss p2p lending. Below are some topics that were being discussed this week.
Default rate and how quickly loans get funded – Interesting discussion of the impact on investors of loans that are funded very quickly.
Next Recession … Keep Buying/Hold/Sell? – What should investors do when the economy dips again?
Business Lending Coming? – The post that broke the news about Lending Club’s plans to start a small business lending program.
Lending Club Working on a Small Business Lending Operation
May 3rd, 2013On the heels of the big announcement yesterday comes more news out of Lending Club. One of the Lend Academy forum members noticed a job opening on LinkedIn earlier this week for a Vice President of Small Business Credit.
The job listing has since been taken down but the astute forum member copied the contents of the job ad and posted it on the forum here. You can plainly see that Lending Club is looking to launch a small business lending operation some time in the future with this new hire helping to craft the strategy and credit policy.
Of course I had to confirm this so I contacted senior management at Lending Club and they did indeed confirm the plans for a new division dedicated to small business loans. Scott Sanborn, the new Chief Operating Officer at Lending Club (he was recently promoted from Chief Marketing Officer), was kind enough to answer some questions for me via email.
Peter Renton: What is behind Lending Club’s decision to expand into small business lending?
Scott Sanborn: While we plan to continue to aggressively grow our consumer loan originations, our ambitions are to apply our efficient model elsewhere and to be more useful to more people.
PR: Why now?
SS: We have record investor demand including specific interest in small business as an asset due to its short duration and attractive yield. We want to begin the development process but be deliberate in our execution.
PR: What time frame are you looking at?
SS: We plan to begin making the loans in less than a year. The job posting is a reflection of our commitment to get started with the crucial building block of credit.
PR: Do you expect to make these loans available to all investors in $25 increments like you do with consumer loans?
SS: Retail investor availability is the tentative eventual plan. We may choose to start with a private offering until we confirm that we have the right product structure and full confidence in our credit model.
So there you have it. Small business lending is coming to Lending Club but first for large investors only it seems. But I would be very surprised if they did not eventually make it available to everyone.
But Small Business Loans Underperform Consumer Loans
You may be thinking that this is a really bad idea. Experienced p2p investors know that the small business category on Lending Club is one of the worst performing categories of all – significantly underperforming debt consolidation loans. So doesn’t that mean it is a bad idea?
I would answer no to that question. The people taking out “small business” loans on Lending Club today are really taking out personal loans and using it for small business purposes. What Lending Club is talking about here is creating a completely new underwriting model where the loan is made to the business not the individual.
Lending Club Will Be Competing With On Deck Capital and Others
On Deck Capital (who incidentally received an investment from Google Ventures this week) has shown that online small business lending has tremendous potential. They have issued over $450 million in short duration (one year or less) loans to small businesses. Their proprietary underwriting model is based on the creditworthiness of the business not the owner something that Lending Club will be trying to emulate.
One of the main differences between On Deck and Lending Club at least from the investor perspective is who invests in these loans. On Deck raises money from the likes of Goldman Sachs and other large Wall Street institutions – not even accredited investors are allowed to invest in the business loans they issue.
There are plenty of other companies making moves in the small business lending space such as Kabbage, Lendio, SoMoLend, Endurance Lending and many others. So Lending Club will have plenty of competition when it comes to finding borrowers.
Small Businesses Offer Higher Yield With Shorter Duration Loans
I am becoming more and more interested in the small business lending space as time goes on. I will be profiling several new investment opportunities here on the blog in coming weeks. There are many advantages to small business lending not least of which is the potential returns for investors. The underwriting in this area has gone through massive changes in just the last five years and is now far more sophisticated than ever before.
Is small business lending risky? Yes, of course. Is it more risky than consumer lending? I don’t think so. Now, we are only just beginning with online small business lending and it will be interesting to see how it develops. But with Lending Club’s brand recognition and expertise in developing an online platform I think investors will find the new offering to be quite compelling.
Is this a good move by Lending Club? As always I am interested to hear what you think.
Hat tip to Edward for discovering this and posting the job ad on the forum.
