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Lending Club Working on a Small Business Lending Operation

by Peter Renton on May 3, 2013

On 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.

{ 10 comments… read them below or add one }

Randawl May 3, 2013 at 11:03 am

Any word whether the loans will be made against accounts receivable or collateralized by other assets?
I’m sure those details will come out in due time. I am interested in knowing how LC will handle collections in this new segment.
Will accredited investors be able to take part in the initial private offerings or will it be further limited to institutional only? I suspect the latter.

Reply

Peter Renton May 3, 2013 at 12:25 pm

No word yet on what assets, if any, will back these loans. I don’t think they have worked that out themselves yet. Pretty much all the details are up in the air right now.

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writing2reality May 3, 2013 at 11:04 am

Peter, thanks for following up with Lending Club on this. I believe this is a pretty exciting addition for Lending Club and will hopefully provide another avenue of returns for investors. My primary concern would be that Lending Club limits things to accredited or institutional investors only.

I don’t believe Lending Club will have any issues finding borrowers as they are beginning to develop a very strong brand within the online lending community. Nor do I believe returns will be as poor as people think as you’ve said. Commercial lending has been a staple of brick and morter banks for a long time quite profitably and the key for Lending Club will be to develop a sound underwriting model that appropriately evaluates the risks involved.

Thanks again for the update Peter!

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Peter Renton May 3, 2013 at 12:31 pm

You’re welcome. Completely agree – the key to their success will be getting the underwriting right. And that is something we won’t know until well over a year after the launch assuming they are considering 12 month loans.

As an aside, I asked Renaud a little about this new direction when I had my conversation with him about the Google deal. I asked him why they didn’t acquire one of the new small business lending platforms in order to get their underwriting expertise. He said they did consider that but decided they would be better off doing it themselves. Exciting times.

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Jilliene Helman May 4, 2013 at 12:08 pm

Very interesting news. I too wonder if they are going into the asset-backed securities world and how it will change their regulatory model. I’d imagine they will need to do a new shelf filing with the SEC for the new asset class once they want to allow their entire user base to invest – i.e. this won’t fall within the existing shelf registration?

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Peter Renton May 6, 2013 at 5:53 am

That is a good question Jilliene. I expect it would have to be a different SEC registration because the underlying security is going to be different. This is why LC will start off with accredited investors. What could well happen, though, is once they do their IPO this new asset class would open up to all investors. We will see.

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Juan Plascencia May 5, 2013 at 10:06 pm

Peter, thanks so much for the great post! Regarding questions about the underwriting model that Lending Club might be using for small business lending, the private equity-backed online lenders in this space (On Deck Capital, IOU Central, Fundnation, etc.) are primarily using a cash flow-based underwriting model. It’s very similar to merchant cash advances, but with additional due diligence layers that mitigate risk such as assessing social media reputation, reading Yelp reviews, and daily electronic monitoring of online bank accounts and credit card processing.

Each lender has its own proprietary model; I like to think of it as “algorithmic banking.” So if Lending Club develops a model, it only makes sense to look at what the leaders in the space are already doing. Who knows? Perhaps Lending Club can create a better model or at least offer new products to investors and borrowers alike.

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Peter Renton May 6, 2013 at 5:59 am

Thanks Juan, I know that Lending Club has been following On Deck and no doubt will be looking closely at all the underwriting models. The thing about the companies you mention is that they are not available to average investors, so Lending Club would be filling a need by making small business lending available to investors.

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Edwin Goitia May 8, 2013 at 11:50 pm

This is extremely exciting. As an aspiring professional investor, I am hoping that Lending Club rolls out a B2B aspect to their service for loaning out to businesses. Owning an LLC myself, I would find it highly beneficial in terms of scaling my business to go to my most trusted source for funds.

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Marc Rouda January 30, 2014 at 11:21 am

Hi Peter, have there been any updates about this since you posted back in May? Just wondering when LC intends to launch their SBL product and if those loans will be available for purchase on an open marketplace.

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