I first learned about Lending Loop about a year ago. Because I am lazier than a trust fund baby, it took me several months to actually check out the service and give them some money.
Lending Loop works something like this. Businesses need money, but banks are notoriously stingy when lending to small business. They want things like personal guarantees and collateral and whatnot. You can’t blame them. Why lend to small business when there are large businesses and potential homeowners who want the cash instead?
It’s tough for small businesses to get funding. They’re often forced to do creative things like hitting up their local private mortgage lender. I’ve done quite a few deals over the years where someone will borrow against their house and put the money into the business.
Lending Loop saw this problem and created a solution. It’s Canada’s first true peer-to-peer lender, connecting small businesses with investors who are looking for yield. Loans yielded anywhere from 8% all the way to over 20%, with most businesses (at least so far, it’s still pretty new) paying back their loans without a hitch.
But then, a problem. The company voluntarily stopped accepting new loans while it worked out its status with each individual provincial securities regulator. That took a few months, but everything ended up fine. It got back into business with the blessing of regulators.
I put some cash into Lending Loop when it opened back up. Here’s my review of the service.
The first step is signing up for an account. It wasn’t a cumbersome experience. It took maybe five minutes of my time, although I just skimmed some of the small print. GASP DON’T TELL THE CHILDREN.
You also have to fill out an investor profile. My risk tolerance is VERY AGGRESSIVE because I’m a badass who lit four buildings on fire before breakfast. THE RUSH, BABY.
The next step is funding your account. All you need to do is give it your account info (found on any cheque), and you’re in business.
I first deposited money back in February, about a week before Lending Loop decided to stop doing new loans. My timing is impeccable. It was an easy process, although it did take a few days for the money to get from my account to Lending Loop’s. I took the money out right afterwards, and it was an easy process.
When the company started doing loans again back in October, I put money back in. It spent nearly a week in transit, but I’m going to chalk that up to the increased demand.
I wanted to post screenshots of loans I’ve funded so far, but when I contacted Lending Loop they told me that wasn’t allowed. They’d like the business info to remain private.
Instead, I’ll be talking about the deals I’ve done in more general terms.
The first one I did was for a construction company in Alberta, who was looking for cash to purchase some equipment that would let it get different jobs.
The company reported good profits over the last three years, and its balance sheet was solid as well. It owed some money already, but it was a reasonable amount. The large amount of current assets concerned me, however. Since it’s a construction company, most of the current assets would likely be in accounts receivable or inventory. They’re clearly not cash, or else the company wouldn’t be borrowing anything.
I wanted to know more details about the accounts receivable, so I asked a question in the Q&A section of the marketplace. I’m still waiting for it to be answered. But the loan did offer interest of 20%+, so that made it easy to overlook any issues. Greed has a way of doing that.
The second loan I did was a restaurant that’s looking to change up their branding. It’s losing money on an income basis, but has plenty of cash flow once we add back in depreciation and amortization. It looked a little riskier than the construction loan, but it offered a slightly lower interest rate of 16%, for some reason. I guess I’m not a great credit analyst.
I threw a little bit of money at it, too. Hey, why not? YOLO kids.
Lending Loop does take some fees, but they’re not excessive. They take 3.5% off the value of the loan as their fee. So if a borrower is looking for $50,000, they’re getting $48,250. They also take 1.5% of each payment as a fee for processing. So my two loans that average 18% will only pay me 16.5%. I’m okay with that.
Should you invest with Lending Loop?
There’s a reason why these loans are paying 15% while sticking your money in a GIC pays 2%. They’re risky, and there’s a very real chance these businesses might stop paying.
There are other issues, too. They’re posting one new loan a week on the marketplace, which isn’t nearly enough. Borrowers are more popular than the only girl at a Star Trek convention, and they treat lenders as so, as my experience with the construction company showed. They didn’t respond to any questions, yet raised all the capital they wanted in just a couple of days.
To their credit, Lending Loop acknowledges this, and would love to see more borrowers.
Overall, the issues I’ve had with Lending Loop are only minor problems. It will get more borrowers. Business funding is a big problem, and it’s a clever solution. When it does, I’ll be there with more money.