Mar 202017
 

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. 🙂


TL;DR

What works

  • 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 properly regulated. Lending Loop is registered as an Exempt Market Dealer across the country. But of course once investors start making loans on the platform then all bets are off. So it’s up to individual investors to decide which companies they want to lend to.

First Impressions

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.

lending loop marketplace details

 

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.

lending loop risk band interest rate ranges

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.

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Feb 232017
 

Several years ago I read a book called Millionaire Teacher by Andrew Hallam. The book explains 9 rules that allow someone on a teacher’s salary to become a millionaire by saving and investing. After purchasing the book I was pumped to find out how he did it. Afterall, if the author managed to pull it off then so could I. 🙂 So here are the 9 rules he outlined in the book.

  1. Don’t spend like you want to appear or feel rich. Instead, spend like you want to grow rich.
  2. Start investing right away to take advantage of time. Compounding interest is the 8th wonder of the world, says Einstein.
  3. Keep your investment fees low. A mutual fund with 1.5% annual fee will eat up a quarter of your investment returns every year given an 6% expected rate of return. That 1/4 return you could have made will stack up to huge missed opportunities in the future.
  4. Learn to control your emotions. Most people get worried and think about selling when the market goes down. But that’s often when stocks go on sale and valuations become more favourable so if anything, that’s the best time to buy. Don’t be emotional. Be rational.
  5. Balance stocks and bonds using the age rule. This basically means keep your age in bonds, and the rest in stocks. So for a 25 year old, his asset allocation would be 75% stocks and 25% bonds.
  6. Many investors have a home country bias. But it’s important to diversify globally.
  7. Many financial advisors and brokers have a strong incentive for you to stay in actively managed funds or other financial products. Understand that they are sales people, and don’t fall for their tactics.
  8. Don’t be seduced by the next hot stock or tempting investment opportunities that seem too good to be true. Stick to index funds.
  9. If you really must pick and choose individual stocks, limit your exposure to 10% of your total portfolio.

The author is one of the most frugal person I’ve know of. He house-sits for vacationers so he could live in their homes for free. He never turns on the heat in the winter and walks around the house wearing layers of clothing. He even catches his own food sometimes.

I generally agree with all 9 of his rules. I don’t follow rule #5 very closely as my asset allocation changes based on economic indicators and not just age. But for the most part I’ve been using Andrew’s advice for many years now, and my finances are in pretty good shape so I guess it’s working. 🙂 I would say the book is a great read for personal finance beginners. It explains lots of fundamental principles about money management. But I don’t think someone with an intermediate level of financial knowledge will learn anything new and substantial from the book.

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Random Useless Fact:

The US Postal Service moves mail using planes, trains, trucks, cars, boats, ferries, helicopters, subways, float planes, hovercraft, mules, bicycles and feet.

Feb 092017
 

I recently watched an HBO documentary called “Becoming Warren Buffett,” which features the life of the man himself. The show gives viewers an extensive look at Buffett’s achievements, struggles, and challenges with his career, and probably more importantly, with his personal relationships.

Buffett started making money at a young age selling gum door to door, and delivering newspapers. He began trading stocks in his early teens and started college when he was only 16 years old. Today everyone knows him as the investment guru who is currently worth about US $72 billion, which makes him the second richest person in the world, right behind his close friend, William. 🙂

becoming warren buffett review

The documentary covers his family background and personal relationships. It felt like I was watching an honest biography about Warren. For the first time ever I got an inside look at the day to day events and lifestyle choices of Warren Buffett. It has been a real eye opener! For example on his way to work in the morning, he often stops by a McDonald’s and orders a Sausage McMuffin.

Doh! :/ No wonder I’m not rich yet. This whole time I’ve been ordering the Bacon ‘N Egg Bagel like a peasant. If only I had known his secret earlier. 😛 Below are some other important lessons I learned from watching “Becoming Warren Buffett.”

  • Live close to work. It takes Warren only 5 minutes to drive to his office everyday. And he’s been taking the same route for 54 years! Not wasting much time on commuting is why he gets so much done.
  • Be smart. Warren admits that he’s wired in a way that gives him an advantage over others when it comes to understanding businesses. He was always good with numbers starting at a young age and learning about the financial markets comes easily to him. Unfortunately for some, intelligence is largely genetic.
  • Read a lot. Every day Warren goes to work and reads books, newspapers, financial reports, or various other material for 5 to 6 hours.
  • Have role models in your life. In the documentary Warren said, “the best gift I was ever given was to have the father that I had when I was born.
  • Develop your own inner scorecard. Don’t let other people’s standards and expectations define who you are or what makes you succeed or fail.
  • Learn from people you trust. Business partner Charlie Munger helped Warren realize that in order to build immense fortune, it’s better to look for great businesses at reasonable prices rather than okay businesses at cheap prices.
  • Develop focus. Warren believes this is the most important quality to have if you want to be successful.
  • Have patience. The biggest factor to making money is time. Warren says you don’t have to be smart to become wealthy. You just have to be patient. 🙂

If we keep in mind these simple guidelines from Warren then I’m sure his wisdom will have an impact on our lives. Depending on different sources, Warren appears to have either an ISTJ or INTJ personality type. This mean he is a rational planner who likes to keep to himself most of the time. As an INTJ myself I understand what it’s like to live inside one’s own head sometimes. It’s probably why I can relate to his investment philosophy. 🙂

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Random Useless Fact:

Jan 012016
 

Year End Review – 2015

I remember 2015 like it was yesterday. 😛 I hope everyone is having a great New Year so far. Let’s review some of the biggest financial news and stories from 2015.

  • Falling commodity prices. – The Standard & Poor’s GSCI commodities index plunged 34% in 2015, down 80% from its peak. It’s now at the lowest level since 1999. This doesn’t directly affect me since I don’t work in that field, but I like how this keeps inflation at bay. Cheaper oil, metals, and other natural resources mean I pay less for transportation, furniture, groceries, and other goods.
  • China’s slowdown. – The Dow Jones industrial average dropped 11% in August on fears that everyone had underestimated China’s troubles and their global impact. This isn’t necessarily a bad thing. High rates of growth is unsustainable. And a market correction is an opportunity to buy stocks at a discount.
  • Interest rate hike in the U.S. – The Federal Reserve raised the short-term rate by 0.25% in December. This increases the value of the U.S. dollar. Meanwhile, the ECB, Bank of Japan, and China continue to go in the reverse direction to expand their money-easing policies.
  • Slide in the Canadian dollar. – Canada’s economy was weak in 2015 due to lower oil prices and we spent half the year in a recession. So naturally our loonie’s value fell compared to the $USD. This is good news for me since I collect a lot of dividends in $USD. 🙂
  • Continuing expansion of the freelance economy. – Uber, Airbnb, Etsy, contract workers, and indie app developers have helped to create an economy where more people are working in a freelancing capacity rather than a regular job in a traditional workplace. Even old trades like construction is being effected because carpenters can sell their services on sites like Thumbtack. I like this trend of becoming a more free and open society with less red tape.
  • Massive corporate mergers. – Mergers and acquisitions worldwide totaled $4.8 trillion in 2015, a new record. This may not be a big deal to some, but it has real implications for stock investors. For example, it’s how I made a large profit when Burger King bought Tim Hortons back in 2014.
  • Lack-luster stock market returns. – According to the CBC, the Canadian stock market index was down 11%. The U.S. markets did better but both the Dow and S&P500 were down. The technology heavy Nasdaq however was up 6%.
  • 16-01-stock-return-for-2015

Personal Goals

At the start of 2015 I set 2 financial goals for myself; have a net worth of $400,000, and make at least $16,000 in passive income. 🙂 Fortunately I was able to hit both by the end of the year. I’ll post my net worth breakdown next week. My pre-tax passive income came from roughly $9K in rent, $5K in dividends, and $2K in interest.

What I learned from the past year is that it is harder than ever before to predict how the markets will change over the next 12 months. This is why it’s important to have financial protection in place and to diversify our investments. Canadian stocks and bonds as a whole did not perform very well last year. But according to the Real Estate Board of Greater Vancouver, the price for a detached house in Metro Vancouver climbed 22% from the previous year. The average condo price was up 14%. The stronger U.S. dollar suggests Canadians who invest in U.S. stocks should have seen some good returns as well. 🙂 So a diversified portfolio of equities, fixed-income, real estate, commodities, and other currencies would have actually performed okay last year despite the stagnant economy in most parts of the world. On average I was able to earn a double digit return in 2015 on my overall investments. I’ll make some new goals for 2016. But first, I need to do some bookkeeping. I haven’t looked at my bank account since last year. 😉

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Random Useless Fact:

16-01-lincoln-clooney-hanks-a-small-world

Dec 302014
 

Financially speaking this has been the best year for me so far. Here’s a 2014 year end review and some updates about what’s been going on in my personal life.

Braces Removed

Earlier this year I decided to get braces for financial reasons. According to my research people with very straight teeth make more money than the average person. The total cost was $2,000 but I think this will turn out to be a great investment in the long run. So here’s an update. A couple of weeks ago I got them removed!

14-12-braces-food

My teeth look great and I’m more confident about my smile 😀 which, according to science, should help me earn more money. 😉 The only issue now is I have to wear a retainer pretty much all the time which makes me sound kind of funny when I talk lol.

Stock Markets Climb

Last year in 2013 the U.S. stock markets gained 30% so many investors decided to sit out in 2014 because they thought stock prices were overvalued. But the Dow in the U.S. gained 9% this year, and up here in Canada the TSX gained about 7%. These 2014 gains are on par with average historical stock market returns. This just goes to show that we should not try to predict future market performance using information from the previous year.

Buy stocks for the profitable companies they represent. For example, I posted my analysis for Dollarama, and explained with logical reasoning why this recession-proof business should outperform going forward. I also blogged about investing in Time Warner, and 21st Century Fox and discussed why these are excellent long term investments.

Today, Dollarama shares are up 34% from when I bought them. Both Time Warner and Fox shares have also returned double digits from my purchase price. No wonder my net worth has been growing like a weed. 🙂 It’s no big deal really. I’m not a stock picking wiz or anything. 🙄 Investing simply works for anyone who follows the basic principles of buying great companies at decent valuations! 😀

Oil Price Slump

Unfortunately, not everything is up this year. The one area of my portfolio that suffered lower prices was oil companies. Luckily I’m well diversified so the impact wasn’t that bad. The important thing is to hold onto large cap energy producers like Suncor and Canadian Natural Resources. Despite the oversupply of oil in the world Suncor shares are still worth more today, $37/share, than when I purchased it last year at $28/share. Large companies don’t get hurt as much when the sector in general underperforms.

Tim Hortons Resolution

Many of you have asked me what I plan to do with my 20 shares of Tim Hortons now that Burger King is buying them. There are usually a few options for shareholders when their company is being taken over. My 3 options, specifically in this case, are:

  1. Cash Tender – To receive $88.50 CAD for each common share of Tim Horton Incorporated tendered.
  2. Stock Tender – To receive approximately 3.0879 common shares of Holdings (to be renamed later) for each common share of Tim Horton Incorporated tendered.
  3. Cash & Stock Tender (Default Option) – To receive $65.50 CAD plus approximately 0.8025 of a common share of Holdings (to be renamed later) for each common share of Tim Hortons Incorporated tendered.

I am going with the default option number 3. I purchased Tim Hortons share for about $50 each back in 2013. Option 3 basically gives me an immediate 30% return on my investment, plus I’ll receive shares in the new holding company, which is a nice bonus. 🙂 I also don’t have to worry about taxes because the transition will take place in my Tax Free Savings Account.

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