March 20, 2014
Is Peer-to-Peer Financing Right for You?
Access to capital remains one of the most challenging hurdles for African American entrepreneurs. Bank loans have for years been a challenge to obtain and have become all but impossible following the credit crisis a few years ago. This has led many entrepreneurs to seek alternative financing–private equity, crowd-funding, and other “non-traditionalâ€ sources.
Lending Club, the largest peer-to-peer lender in the U.S., recently announced the launch of a new business loan platform. Peer-to-peer lending is typically unsecured loans provided by “peers” by way of online lending platforms with various credit checking tools. Lenders offset risk by choosing to which borrowers to lend, and by diversifying their investments among different borrowers.Â According to the company, business loans will range from $15,000 to $100,000 initially, with fixed interest rates starting at 5.9% and terms of one to five years. BLACK ENTERPRISE spoke with CEO Renaud Laplanche about the new line of business and how it will impact small business lending. Here’s what he had to say:
Lending Club is already the largest peer-to-peer consumer-lending platform. Why the move to include small businesses?
Renaud Laplanche: We have pretty ambitious goals. We want to transform the banking system into a marketplace that is more competitive, more customer friendly, and more transparent. We’re only going to be more relevant to more people if we address more use cases and expand the population we are addressing.
U.S. small businesses are an engine of job creation and economic growth, but their access to capital has been constrained. This is particularly true for smaller businesses that need smaller amounts of capital. While bigger businesses can get large loans from banks, loans in smaller amounts aren’t widely available–and when they are, the terms are often poor. We designed this product to address a gap in the market. We believe our technology-driven solution can bring underwriting costs down and make credit more available and more affordable to small businesses in America.
Small business lending has declined over the years primarily because banks have become more risk averse. So why do you expect to succeed as a small business lender?
Laplanche: Lending Club replaces traditional bank operations with an online marketplace that operates at a lower cost than the banking system, helping borrowers lower the cost of their credit and investors achieve higher returns. More than $3.8 billion in loans have been originated through our platform since inception, including $2 billion in 2013 alone. With this new product, small business owners will have access to customer-friendly, transparent, and affordable financing options similar to those Lending Club has been providing to consumers since 2007. The underwriting and servicing costs banks incur are simply too high for them to efficiently make loans of $50,000 or $100,000. Our tech-enabled solution is highly efficient, so we can broaden access to capital to a larger base of small businesses.
The Wall Street Journal put out an online article that basically says loans to African American owned businesses are down sharply since the financial crisis. Are you looking at any measures to ensure that there’s some degree of parity with your business lending practices?
Laplanche: Absolutely. Lending Club is subject to and adheres to the Equal Credit Opportunity act, as well as all other relevant lending regulations.
Will you be looking at the same criteria as do banks to determine credit worthiness?
Laplanche: While most banks focus only on larger businesses, Lending Club’s SMB product is targeted at companies with revenues between $100,000 and $5 million that have been in business for at least two years, usually with fewer than 100 employees. Our objective is to provide a broad range of SMBs with a simple, transparent way to get access to capital at a low cost. Businesses must have at least $75,000 in sales to be eligible.Â A few of the many metrics we take into consideration include whether the business has successfully borrowed money in the past, current debt vs. revenue, the owner’s consumer credit, and the loan’s size and importance relative to the size of the business itself.