Sir Ernest Shackleton was one of the great polar explorers of the early 20th century. His ship was the Endurance. When his expedition was trapped on Antarctica in 1914 he led one of the greatest rescue missions of all time and every member of his crew survived.
This story is inspiring and one that resonated with Sam Hodges and Alex Tonelli. They liked it so much they decided to take the name of their new company from the ship at the heart of this amazing story. So, Endurance Lending Network (I will shorten to Endurance) was born.
The roots for Endurance go back to 2011 when Alex Tonelli was trying to get a business loan for his successful fitness center business. He was rejected for a $75,000 loan even at a 20% interest rate. Discussing this experience with one of the gym’s investors, Sam Hodges (who had experience with financial marketplaces from his time at SecondMarket), the two hit on a way of addressing this pain point: build a marketplace for small business loans.
Together Sam and Alex raised a $1.5 million seed round in the spring of 2012. This allowed them to build out their platform and their team. The first loan issued by Endurance was closed in April 2012 and they spent the rest of that year honing their online borrower platform, setting up their regulatory framework and building a backlog of interested lenders.
In my recent conversation with Sam Hodges he was very careful not to give away their current loan volume he did say that in July they processed 600 inbound loan applications and a meaningful share of these were fundable.
The Median Loan Size is $155,000
So what kind of business loans are we talking about here? These are all three-year loans with interest rates ranging from 10.9% to 14.9%, with the average being at the higher end of that range. The loan sizes range from $25,000 to $500,000 and the median loan size right now is $155,000. There is a flat 2.99% origination fee on every loan.
Around half of the loan applications they have received are from franchisees, particularly established players like Subway and Papa Johns. They like this market and they have deliberately focused here because failure rates are much lower than for the overall small business market and because they can build deep partnerships with the franchise parents.
Like Lending Club and Prosper these are amortized loans that are payable in monthly installments over three years. But unlike the consumer p2p loans these are secured loans. Endurance is typically the senior secured lender with one or more personal guarantees from the business owners as well as security interests in the business assets (such as equipment), which they substantiate through UCC filings.
Zero Percent Delinquencies
Given all this I was curious about defaults. They have an expected loss rate of 0.5% to 1%, far lower than Lending Club and Prosper. I was initially skeptical of this projection until I asked for details about their current portfolio.
Now, keep in mind their oldest loan was issued only 15 months ago and the majority of their portfolio is less than six months old. But when I asked what percentage of their portfolio has defaulted or is late I was very surprised to learn that every single loan is current. That’s right, no late loans and no defaults. Of course, they don’t expect it to stay this way forever but right now they are very pleased with their results.
A Rigorous Underwriting Process
To achieve a zero delinquency rate, even at this early stage, points to strong underwriting. Endurance uses a multi-factor scoring engine for both the business owners and the business entity itself. It uses a combination of self-reported data from the founders as well as external data.
They use traditional finance data such as balance sheets as well as income and cash flow statements. Some of this is self-reported but they also are hooking into the Intuit APIs for personal and business data (from Quickbooks). They will also use plenty of alternative data such as LinkedIn profiles (mainly for identity verification) as well as Yelp business ratings.
Borrowers can receive a preliminary approval within 24 hours of their application with final approval coming anywhere from 2-10 days depending on how quickly the borrower responds to verification requests. An Endurance team member will personally speak with every borrower.
What is in it for Investors?
Endurance is open to accredited investors with a minimum investment size of $50,000. Expected returns to investors right now are in the 13.7% range. This is achieved by a very low loss rate and the fact that today Endurance is sharing some of their origination fee with investors. Once that incentive program ends long-term returns for investors in the future should be 12-13% on the current product – and potentially even higher on less highly-rated loans.
Today there is no marketplace of loans for investors. Instead, there is a pooled investment structure where capital from investors is accumulated and then drawn down to fund borrower loans. This means there is no mechanism in place yet for investors to choose loans, although they are working on developing one.
In the near term Endurance expects to have three options for investors:
- Pick and choose loans in on open marketplace.
- Create an automated investment allocation based on various criteria.
- Pooled investment structure.
Vision for the Future
Endurance is focused on a very big problem – helping small businesses get access to capital. Their vision is focused but grand: they want to be the premier small business bond marketplace in the United States.
Eventually, they will be open to all investors, not just those who are accredited. Whether that is through an S-1 registration, like Lending Club and Prosper have done, or through the creation of a publicly listed fund is undecided. But one thing they are clear about – they want every investor to have the opportunity to help provide funding for small businesses.
At 15 months old, Endurance is one of the more established online small business lending platforms. They have made a great start to their business laying what appears to be a solid foundation to build upon. This foundation was supported recently with the addition of Glenn Goldman to their Board of Advisors. Goldman is the former CEO of Capital Access Network, the largest non-bank provider of capital to small businesses in the US.
The team at Endurance no doubt has some obstacles ahead of them in establishing themselves as a major player in small business lending. But they draw their inspiration from that intrepid British explorer Shackleton who overcame almost impossible odds in the face of incredible hardships. The waters that Endurance Lending Network need to navigate should be far less challenging.
This article is provided for information purposes only. It is not investment advice nor is it an endorsement for investing in the loans of Endurance Lending Network. I have not made any investment myself (although I do intend to) and I receive no financial reward from Endurance Lending Network whatsoever.