The premise of Lending Loop (www.lendingloop.ca) is simple: They are a new Canadian start up that enables you lend your money directly to companies. This has been done in the United States but this is the first Canadian-focused start up. They opened for business in the fall of 2015 and when I heard about them I signed up immediately. I have been watching them from the start and am a “lender” myself. The following is my thoughts on how things have gone so far.
Historically, Canadians (those with a small net worth anyway) haven’t had many investing options. You can always put your money in a bank and get pitiful interest as your reward or you can invest in a bond fund, mutual fund, or increasingly stocks now that fees are quite low. However, other types of investing are limited to “accredited investors”, i.e. investors with large asset bases. Lower net worth individuals are protected from themselves by the government through minimum net worth requirements or are simply locked out because of the logistics of firms not wanting or able to deal with small amounts of money from a large group of people.
Lending Loop is opening up a world of finance that traditionally hasn’t been available to smaller investors - direct lending to companies. You lend as little as $50 and then receive interest and principal back over a few years.
The process – Lending Loop acts as the middleman between the lenders (you) and the company, replacing the traditional role of the bank. However, rather than the bank borrowing money from you (paying you practically nothing) and then lending it to someone else, you get to lend your money directly at your own discretion. Loan sizes so far have typically been in the $10,000-50,000 range. They conduct due diligence of the company and, if it meets their minimum lending requirement guidelines, it is given a loan rating from A+ to C with the interest rate paid based on the rating. Lending Loop makes money as the loan administrator. If a company pays, say 10% per year, Lending Loop will take 1.5% as its management fee. They also charge the company an upfront fee, which is disclosed but does not involve or benefit the lenders in any way. The full fee schedule can be found here: https://www.lendingloop.ca/help#fee_schedule
Loan structures so far have been simple amortizing loans with principal and interest payments spread out monthly over 2-4 years. All loans I have seen have been simple term loans supported by personal guarantees (although you do not get information on the guarantors, see further discussion below). There are no other structures such as including balloon payments or receivables based lending, and understandably so. They want to keep things simple to simplify management and keep the process straightforward for lenders and borrowers. Companies will still need a bank for their day-to-day needs. Companies so far have included a tax preparation office, a yoga place expanding to a new location, and a Second Cup.
My experience so far has been good. I put in a few hundred dollars and have provided funding to a few companies. It was easy to transfer funds into the account and the process is transparent. So far I have received the first few payments without issue.
However, information given to lenders is pretty light. You are provided with the company background, some basic financial statement information (last few years balance sheet and income statement provided in Lending Loops format, albeit brief) and information on the structure (e.g. 3 year loan, personal guarantee provided). However, loan requests remain open for a period of time where you can ask management questions directly. You also do not have to commit to any company you do not like of course and the minimal disclosures need to be put in perspective as you are contributing as little as $50. That said, at the moment I would be hard pressed to make a large commitment to any individual loan myself.
Loans are only committed once they are fully funded. If they are not fully funded by the deadline they do not go through, although I have not seen this happen yet.
If something goes wrong (such as the company cannot make a payment) it is handled by Lending Loop. In the loan agreement Lending Loop has discretion to manage the process on behalf of lenders, as negotiating a restructuring with potentially hundreds of individual lenders would be a nightmare. That said, as someone with lending experience it is unclear to me how this is going to work in practice. Most borrowers I have seen so far on the site have been asset-lite but supported by personal guarantees. I imagine most failures will result in bankruptcies and sale of company and personal assets for repayment rather than some sort of more complicated restructuring process. I also imagine that there won’t be a lot of assets to liquidate for repayment in some of these situations.
Other issues – There are a number of potential problems with this model. The most important one to me the agency issue. They make their fee from underwriting new loans while they do not have skin in the game. This could lead to issues such as them underestimating the risk of loans by accident or otherwise. That said, it would not take many bad situations for them to lose creditability (and, in turn, tank the firm) and I believe they are well aware of this. Various members of the Lending Loop team also seem to have decent experience with several of them having commercial/corporate lending backgrounds at Canadian banks. This helps but it is still an issue to be very conscious of.
From a borrower perspective the financing seems quite expensive. Many loans are in the 10-12% interest rate range (never mind the up front fees paid to Lending Loop) so it seem that borrowers might be choosing Lending Loop because they do not have access to traditional bank lending, potentially indicating a higher risk profile. That said, Canadian banks are notoriously rigid and uncreative, unless of course you want to mortgage a half a million dollar home. They can’t be blamed completely as they are buried in red tape, either self-imposed or by a friendly regulator.
I think Lending Loop might have found a real niche here and I applaud them for trying something new. Frankly, I have found the process quite fine. It is a different feeling lending directly to a company and gives you a sense of ownership. That said, I am using it as a side thing for small amounts of money. There is real risk here and it won’t be replacing my regular portfolio anytime soon. I want to see how things go over the next year or two (and the results of bad loans when they inevitably show up). In the meantime, Lending Loop will provide me with a bit of fun and diversification.