Last week we shared the news that the three largest online small business lenders were forming a trade association to address complaints about the information and transparency they provide to borrowers. During the last few days, the need for such a lobbying group has become more and more apparent as the alternative, or “marketplace,” lending industry—both small business and consumer focused—has been battered by controversy and, according to The New York Times, even doubts by investors regarding its longterm viability.


The terrible, horrible part

LendingClub | The company’s CEO resigned after a board review found the company sold an investor $22 million in loans with characteristics violating the investor’s “express instructions.” The company’s stock price fell dramatically after the news was released. (WSJ.com)

Prosper | Blaming a “tightening of the capital markets,” the company announced it was laying off one-third of its employees. (PYMNTS.com)

OnDeck | OnDeck Capital’s stock price fell by more than 34 percent after it reported a much wider loss than expected.  (Barrons.com)

Why the bad news?

Online lenders have been created using a model loved by venture capital investors, borrowers, and lenders. Without the expense of bricks and mortar branches and free from many federal regulations regarding reserve money, these lenders, called “marketplace lenders,” have been able to match consumers and small businesses, hoping to borrow a few thousand dollars, with individuals or Wall Street investors looking to lend money.

Quote from NYTimes.com:

“Just months ago, it seemed marketplace lenders couldn’t churn out loans fast enough. Investors like hedge funds, insurance companies and pension funds were clamoring to buy large pools of these loans, which offered an attractive return at a time of record low interest rates. But in the first quarter, lenders like Lending Club, Prosper and OnDeck Capital had difficulty convincing investors that their business models are sound. Even though the majority of the companies’ borrowers continue to pay their loans on time, Wall Street investors have started to worry about the prospect of increasing defaults.”

What’s next?

The need for marketplace loans by small businesses is a separate issue from the needs by Wall Street for investment opportunities. (We’ll leave all discussion regarding Wall Street to other sources.)

However, as we have shared in the past, the claim by marketplace lenders that small businesses are facing a credit crunch runs counter to the long-running monthly survey of small businesses by NFIB which currently (4/2016) says, “Loan demand remains historically weak, owners can’t find many good reasons to borrow to invest when expectations for growth are not very positive.”

As always, a recommendation

Any type of borrowing or financial decisions should be discussed with your tax and financial advisor as everyone’s situation is different and there are no one-size-fits-all approaches.


 

7
Online Small Business Lenders Unveil New Trade Association, Tools For Transparency in Fees, Costs | 2016

The fast growing industry is responding to complaints about transparency of fees.

8
Treasury Department Studying Small Business Alternative Lending | 2015

U.S. Treasury Department is studying the fast-growing online marketplace lending industry.

9
SEC Finally Issues Rules for Small Business ‘Mini IPOs’

The Securities and Exchange Commission (SEC) has adopted final rules to facilitate smaller companies’ access to capital that were mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act.

10
Answering the Riddle: Are Banks Not Lending to Small Businesses, or Are Small Businesses Not Borrowing from Banks? | 2015

Small businesses are reporting their lending needs are being met, yet banks are lending to small businesses less than before 2008. Why?

11
Small Business Lender OnDeck Capital Steps Up to Bat, Hits IPO Homerun | 2014

OnDeck Capital, which makes loans to small businesses, rallied more than 30 percent on its first day of trading.

12
How the Credit Crisis and Recession Changed Small Business Lending Permanently | 2014

The difficulty many small businesses have had in securing traditional bank debt has led to non-bank, internet-enabled lending alternatives that will change the landscape of small business lending well into the future.

13
Small Business Lender OnDeck Capital Preparing IPO | 2014

Small business lender OnDeck Capital Inc. is preparing to file for an initial public offering that could value the business at roughly $1.5 billion.

14
SmallBusiness.com Introduction to Peer-to-Peer Lending | 2014

New internet-powered models of business lending match up individuals who want to borrow with those who have funds to lend (at higher interest rates than alternative investments).

15
SmallBusiness.com’s Introduction to Crowdfunding | 2014

An introduction to various ways of funding a business project–or the business itself–by combining small amounts of money contributed by each individual in a large group.