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New Fund Invests in Small Business Loans

by Peter Renton on May 13, 2013

Those 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.

{ 7 comments… read them below or add one }

Bryce M. May 13, 2013 at 11:01 am

Super excited about investing in Brendan’s fund. One of the things that drew me to this fund was the way that loans are paid down–those who read IOUCentral’s website will see that daily ACH transactions are made. Problems are known quickly, and communication is fast. Of course, very few problems have even presented themselves so far. The default rate is impressively low. Like Peter said, these are not startups and have good cash flow.

More diversity into direct lending is a good thing and, like Brendan, I have reached the point where I can’t increase my LC portfolio much more without bordering on irresponsibility. Good for all of us! And kudos to Mr. Ross for making a mark.

Reply

Peter Renton May 13, 2013 at 3:24 pm

Good to hear the perspective of another investor Bryce. The daily ACH payments is one of the clear advantages that small business lending has over consumer lending. That, combined with the shorter loan term, low default rate and the higher average interest rates are primary reasons why I invested.

Reply

Martin May 14, 2013 at 10:19 pm

This sounds interesting, but it looks like I must pass this opportunity by. I do not have 100k available to invest. But I have heard that Lending Club is thinking on opening this option of investing into small businesses. Hopefully they will open it to general public and not to big guys only.

Reply

Peter Renton May 15, 2013 at 6:42 am

As I said Martin, this is not for everyone. In coming months there will more opportunities for non-accredited investors, in fact I am profiling one such opportunity here later this week.

Reply

Martin May 15, 2013 at 9:51 am

I’ll wait for your post on this. Although I am OK with what I have so far (stock investing, ROTH and LC), it would be nice to have another opportunity to diversify investments.

Reply

diane hicks May 15, 2013 at 10:15 am

This sounds very interesting. Thanks for doing the research and sharing this information, Peter. It’s very frustrating to unaccredited investors like myself that we cannot participate in these vehicles. What are small investors who do not wish to be part of the stock market casino to do??

Reply

Peter Renton May 15, 2013 at 2:16 pm

Stay tuned Diane. There will be plenty of opportunities for non-accredited investors that I will feature on the blog in coming months.

Reply

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