I’ve been using a peer to peer lending service called Lending Loop for several months now. It allows businesses to access financing from lenders all across Canada (except in Quebec due to excess regulatory hurdles.) There’s about 6,800 investors using the platform so far. I thought I’d share my thoughts about investing in Lending Loop. Discuss the advantages and risks. And answer some common questions readers may have about the process. 🙂
- Website design and easy to use.
- Responsive support.
- Using technology to solve business problems.
- Reasonable projected returns (5% to 10% pre-tax) on investment given the risk involved.
- Alternative asset class that is not highly correlated with the stock market.
- Transparency and thorough reporting.
What can be improved
- It’s currently not eligible for RRSP/TFSA 🙁 This is a problem due to the asymmetric tax disadvantage of debt instruments.
- Font on site can be hard to read due to small size and low contrast with background, especially the Q&A sections in the Marketplace.
- Limited financial history for borrowers. It would be nice to see 4 or 5 year history for more established businesses.
- Lack of a discussion forum. It could be beneficial for lenders to have an online space to correspond openly with each other about loans in the marketplace. The Lending Loop subreddit has restrictions about what information can be communicated.
Full review below…
What is Lending Loop?
There are many small and medium size businesses in Canada that have trouble raising money to expand their operations. Applying for debt can be a challenge because traditional banks are hesitant about lending money to entities with erratic income streams such as restaurants, contracting, etc. Large financial institutions generally can’t allocate the appropriate resources to underwrite small deals with the sophistication they require and struggle to price them according to the actual risk. As a result a lot of high quality deals simply fall through the cracks.
This is where Lending Loop (LL) comes in. It’s a crowd sourcing platform that raises money for growing Canadian companies. Based in Toronto, Lending Loop is Canada’s first (and currently only) fully regulated peer-to-peer lending platform. It operates an online marketplace that connects small and medium-sized businesses that are looking for debt financing with Canadian investors. It allows all investors, regardless of wealth or income, to access a high-yield fixed income asset class.
How Does Lending Loop Work?
Businesses can apply for a term loan product with flexible terms. The amount could be as small as $5,000 and as large as $500,000. Most loan durations are from 3 months to 3 years, but some can be as long as 5 years. Once approved, the loan goes into Lending Loop’s Marketplace where investors have 30 days to fund the project. If the loan becomes fully financed before the funding period expires, the loan will go through a finalization stage for a few days before it starts going into scheduled payments.
Investing with Lending Loop is safe, in the sense that it is a properly regulated company with government oversight. Lending Loop is registered as an Exempt Market Dealer in most provinces. But of course the individual loans on the platform are subject to scrutiny and due diligence just like any other investment. So it’s up to individual investors to decide which companies they want to lend to.
Registering on the Lending Loop site as an investor is a pretty simple process. I filled in some online forms and provided some personal information such as my address and Social Insurance Number (for CRA purposes.) Then I answered an investor questionnaire to assess my personal preferences and risk tolerance. I obviously got the “very aggressive” result. 😀 The last thing I did was connect my TD bank account with Lending Loop using the information from my cheque book so I can transfer funds back and forth. The entire process takes about 1 to 2 weeks.
The overall site design is pretty clean and easy to navigate. The main dashboard page gives a broad overview of my account situation.
The Marketplace is where all the action is. 🙂 This is where investors can shop for the best loans. There are usually around 5 to 10 different loans looking for funding at any given time. The companies are listed in order of when they first appear on the marketplace. There’s a brief description about each business, and the nature of their loan.
Clicking on any individual loan will take you to the detailed page where you can see the company’s financial details, what the owner intends to use the loan for, and other Lending Loop investors who have already committed to investing in the loan. There’s even a Q&A section within this area where lenders can ask the borrower questions.
About the Loans
The funding process begins with a loan application. Borrowers are required to be incorporated or a partnership for at least 1 year and have generated a minimum of $100,000 in annual revenue. Once this minimum criteria is met, Lending Loop’s credit assessment team performs a formal review of the loan application.
Lending Loop uses its proprietary evaluation and scoring system to assess a company’s creditworthiness. Factors in the credit evaluation may include:
- A business credit score obtained from a credit rating agency, which may take into account payment and delinquency history, delinquency patterns, years in business, years borrowing, the business’ size, and industry segmentation, among others;
- Various financial metrics such as the business’ debt service coverage ratio, debt-to-tangible net worth, and working capital ratio, among others;
Once a loan is approved it is added to the Marketplace and assigned a Lending Loop Credit Rating. This rating, consisting of a rating from A+ through E, is intended to quantify the level of risk associated with a particular listing and corresponds to an estimated loss rate for the loan. The higher the rating the lower the default risk. 🙂 Here is a look at the Lending Loop interest rates for each risk band.
These interest rates are what the borrowers pay. Lenders are charged a servicing fee amounting to an annualized rate of 1.5% of the outstanding principal amount owed on a loan every time a monthly payment is made. For example, if a loan rated B has a posted interest rate of 11.5%, then investors can expect to actually receive 10% yield on their investment if all goes well.
All loans are amortized using the declining balance method over the term of the loan. So similar to a mortgage, the loan is paid back in monthly installments with principal and interest until the loan balance is gradually paid off. All Lending Loop interest rates for loans are fixed.
Small loans under $30,000 are usually funded very quickly, within a couple of days of being published on the marketplace. But larger deals worth $150,000 or more can take weeks to fund or sometimes fail to become fully funded so the loan doesn’t go through and committed investors get their money back.
Currently there aren’t any liquidity options as there is no secondary market, so lenders would be fully paid back only at the time of the last payment.
Continue reading »